A Heterogeneous-Agent Foundation of the Representative-Agent Approach

41 Pages Posted: 1 Oct 2016

Date Written: September 30, 2016


The representative-agent approach is widely used in consumption-based asset pricing. From a theoretical point of view, quite restrictive assumptions on the underlying economy are needed for asset prices to depend only on aggregate consumption. A heterogeneous-agent financial market model is presented with all investors following simple rebalancing rules where aggregation already fails. A meaningful specification of a representative agent is still possible: Instead of asset prices per se the representative agent indicates the direction in which relative asset prices tend to in expectation from one time period to the next. The objective function of the representative agent is independent of the set of rebalancing rules participating in the market.

Suggested Citation

Elmiger, Sabine, A Heterogeneous-Agent Foundation of the Representative-Agent Approach (September 30, 2016). Swiss Finance Institute Research Paper No. 16-58. Available at SSRN: https://ssrn.com/abstract=2845944 or http://dx.doi.org/10.2139/ssrn.2845944

Sabine Elmiger (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

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