Dynamic Equilibrium with Heterogeneous Agents and Risk Constraints

55 Pages Posted: 15 Sep 2010 Last revised: 17 Oct 2011

Date Written: June 1, 2010

Abstract

We examine the impact of risk-based portfolio constraints on asset prices in an exchange economy. Constrained agents scale down their portfolio and behave locally like power utility investors with risk aversion that depends on current market conditions. The imposition of constraints dampens fundamental shocks, challenging studies that suggest that risk management rules amplify aggregate fluctuations. Constraints may give rise to bubbles, whose emergence is associated to the risk aversion distribution across agents and the severity of the risk constraints.

Keywords: Asset pricing bubbles, Endogenous regimes, General equilibrium, Risk constraints, Stochastic volatility

JEL Classification: D51, D52, D53, G11, G12

Suggested Citation

Prieto, Rodolfo, Dynamic Equilibrium with Heterogeneous Agents and Risk Constraints (June 1, 2010). Available at SSRN: https://ssrn.com/abstract=1675965 or http://dx.doi.org/10.2139/ssrn.1675965

Rodolfo Prieto (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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