Asset Pricing with Heterogeneous Agents and Non-Tradeable Assets
30 Pages Posted: 24 May 2017 Last revised: 8 Dec 2019
Date Written: December 7, 2019
Abstract
This paper develops a tractable asset pricing framework based on an Arrow Debreu economy with heterogeneous agents. The assumption of heterogeneity recasts the market rather than aggregate consumption as the key element for pricing securities. The model expresses some asset pricing relationships in terms of four underlying variables. It develops a new formulation for the market risk premium and the earnings price ratio.The theoretical results are used to estimate preference parameters, which yield a value of relative risk aversion between 1.3 and 1.9, and a time preference discount rate between 2.8% and 4.6% per year.
Keywords: Asset pricing, complete markets, equity risk premium puzzle, risk free rate puzzle
JEL Classification: D53, E10, E21, G12, G13, G30, G32
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