Preference Evolution and the Dynamics of Capital Markets

48 Pages Posted: 11 Jun 2012 Last revised: 2 Sep 2015

See all articles by Giuliano Curatola

Giuliano Curatola

University of Siena - Department of Economics and Statistics; Leibniz Institute for Financial Research SAFE

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Date Written: August 31, 2015

Abstract

This paper introduces endogenous preference evolution into a Lucas-type economy and explores its consequences for investors' trading strategy and the dynamics of asset prices. In equilibrium, investors herd and hold the same portfolio of risky assets which is biased toward stocks of sectors that produce a socially preferred good. Price-dividend ratios, expected returns and return volatility are all time varying. In this way, preference evolution helps rationalize the observed under-performance and local biases of investors' portfolios and many empirical regularities of stock returns such a time variation, the value-growth effect, momentum, mean reversion and excess volatility.

Keywords: Asset pricing, general equilibrium, heterogeneous investors, interdependent preferences, portfolio choice

JEL Classification: D51; D91; E20; G12

Suggested Citation

Curatola, Giuliano, Preference Evolution and the Dynamics of Capital Markets (August 31, 2015). Available at SSRN: https://ssrn.com/abstract=2082308 or http://dx.doi.org/10.2139/ssrn.2082308

Giuliano Curatola (Contact Author)

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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