Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing

38 Pages Posted: 15 Aug 2015

See all articles by Nicolae Garleanu

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stavros Panageas

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: March 1, 2014

Abstract

We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate heterogeneity in risk aversion from heterogeneity in the intertemporal elasticity of substitution, and an overlapping-generations framework to obtain a non-degenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations, and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating IES and risk aversion heterogeneity can have a substantive impact on the model's (qualitative and quantitative) ability to address some key asset pricing issues.

Suggested Citation

Garleanu, Nicolae Bogdan and Panageas, Stavros, Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing (March 1, 2014). Fama-Miller Working Paper ; Chicago Booth Research Paper No. 15-36. Available at SSRN: https://ssrn.com/abstract=2643621 or http://dx.doi.org/10.2139/ssrn.2643621

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stavros Panageas (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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