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Consumption Risk, Preference Heterogeneity and Asset Prices

Giuliano Curatola

Goethe University Frankfurt - Research Center SAFE

Roberto Marfè

Collegio Carlo Alberto

September 1, 2012

This paper proposes a pure-exchange economy with three key ingredients: habit formation, stochastic moments of aggregate consumption, and a small degree of heterogeneity in risk aversion consistent with empirical data. We obtain closed formulas for many equilibrium quantities, including the moments of stock returns and individual portfolios. The proposed framework explains simultaneously the main features of stock returns – like cyclicality, persistence and predictability – as well as the counter-cyclical dynamics of the trading volume and its correlation with stock returns. In addition, we provide new testable implications concerning the dynamic behavior of the cross-sectional consumption/portfolio distribution over the business cycle.

Note: An earlier version of this paper was circulated under the title: "Catching up with the Joneses under Preference Heterogeneity: An Exact Solution."

Number of Pages in PDF File: 55

Keywords: equilibrium asset pricing, heterogeneous preferences, external habit, portfolio strategies, closed form expression

JEL Classification: D51, D53, D83, G11, G12

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Date posted: March 28, 2011 ; Last revised: October 16, 2014

Suggested Citation

Curatola, Giuliano and Marfè, Roberto, Consumption Risk, Preference Heterogeneity and Asset Prices (September 1, 2012). Available at SSRN: https://ssrn.com/abstract=1793747 or http://dx.doi.org/10.2139/ssrn.1793747

Contact Information

Giuliano Curatola
Goethe University Frankfurt - Research Center SAFE ( email )
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323

Roberto Marfè (Contact Author)
Collegio Carlo Alberto ( email )
via Real Collegio 30
Moncalieri, Torino 10024
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