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The Dynamics of Heterogeneity and Asset Prices

36 Pages Posted: 24 May 2017  

Walter Farkas

University of Zurich, Swiss Finance Institute (SFI) at Department of Banking and Finance; ETH Zürich - Department of Mathematics; Swiss Finance Institute

Ciprian Necula

University of Zurich - Department of Banking and Finance; Bucharest University of Economic Studies, Department of Money and Banking

Date Written: April 25, 2017

Abstract

In the context of a continuous-time pure-exchange economy model, the paper develops a novel methodology, based on measure-valued stochastic processes, for analyzing the evolution of heterogeneity in a tractable manner and studying its impact on asset prices. The agents in the economy differ with respect to impatience, risk aversion, beliefs about the growth rate of output, and to the rules for updating beliefs. The heterogeneity itself is described by a single object, a measure, and its dynamics by a measure-valued stochastic process. A key contribution of the paper consists in obtaining a closed form formula for the stock price in the case in which preferences are homogeneous with the risk aversion parameter given by a natural number. We also synthesize and generalize existing results about the equilibrium in heterogeneous pure-exchange complete markets economies and we highlight the importance of the endogenously determined risk tolerance weighted consumption distribution as a key ingredient in driving the equilibrium variables.

Keywords: heterogeneity, asset prices, beliefs, pure-exchange economy, measure-valued stochastic process

JEL Classification: G12, D51, D53, D91

Suggested Citation

Farkas, Walter and Necula, Ciprian, The Dynamics of Heterogeneity and Asset Prices (April 25, 2017). Swiss Finance Institute Research Paper No. 17-21. Available at SSRN: https://ssrn.com/abstract=2973276 or http://dx.doi.org/10.2139/ssrn.2973276

Walter Farkas

University of Zurich, Swiss Finance Institute (SFI) at Department of Banking and Finance ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland
+41-44-634 3953 (Phone)
+41-44-634 4345 (Fax)

HOME PAGE: http://https://people.math.ethz.ch/~farkas/

ETH Zürich - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland

HOME PAGE: http://https://people.math.ethz.ch/~farkas/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ciprian Necula (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Bucharest University of Economic Studies, Department of Money and Banking ( email )

6, Romana Square, District 1
Bucharest, 010374
Romania

HOME PAGE: http://www.dofin.ase.ro/cipnec

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