Heterogeneity and Limited Stock Market Participation
37 Pages Posted: 6 Mar 2014 Last revised: 9 Apr 2015
Date Written: March 25, 2015
We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. We solve the associated sup-convolution problem, and obtain explicit closed form solutions. The heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio. This results in plausible values for the preference parameters of the two agents under various assumptions for the wealth portfolio.
Keywords: The equity premium puzzle, the risk-free rate puzzle, recursive utility, the stochastic maximum principle, heterogeneity, limited market participation
JEL Classification: D51, D53, D90, E21, G10, G12
Suggested Citation: Suggested Citation