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

Suggested Citation

Cantillo, Miguel, Asset Pricing with Heterogeneous Agents and Non-Tradeable Assets (December 7, 2019). Available at SSRN: https://ssrn.com/abstract=2972964 or http://dx.doi.org/10.2139/ssrn.2972964

Miguel Cantillo (Contact Author)

Universidad de Costa Rica ( email )

San Jose
Costa Rica

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