Preference Evolution and the Dynamics of Capital Markets

SAFE Working Paper No. 128

52 Pages Posted: 14 Mar 2016

See all articles by Giuliano Curatola

Giuliano Curatola

Goethe University Frankfurt - Research Center SAFE

Date Written: March 13, 2016

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 and stochastic 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 (March 13, 2016). SAFE Working Paper No. 128. Available at SSRN: https://ssrn.com/abstract=2747269 or http://dx.doi.org/10.2139/ssrn.2747269

Giuliano Curatola (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

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

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