Heterogeneity and Limited Stock Market Participation

37 Pages Posted: 6 Mar 2014 Last revised: 9 Apr 2015

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: March 25, 2015

Abstract

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

Aase, Knut K., Heterogeneity and Limited Stock Market Participation (March 25, 2015). NHH Dept. of Business and Management Science Discussion Paper No. 2014/5. Available at SSRN: https://ssrn.com/abstract=2404973 or http://dx.doi.org/10.2139/ssrn.2404973

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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