Asset Pricing with Heterogeneous Agents and Long-Run Risk

76 Pages Posted: 9 Nov 2017 Last revised: 12 May 2020

See all articles by Walt Pohl

Walt Pohl

NHH Norwegian School of Economics; University of Zurich

Karl Schmedders

IMD Lausanne

Ole Wilms

Tilburg University - Tilburg University School of Economics and Management

Date Written: September 19, 2018

Abstract

This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption and wealth shares of the agents. This time variation can resolve several asset-pricing puzzles, including the large countercyclical variation of expected risk premia, the volatility of the price--dividend ratio, the predictability of cash flows and returns, and the large predictability of returns in recessions. These findings show that belief differences, a widely observed attribute of investors, significantly improve the explanatory power of long-run risk asset-pricing models.

Keywords: belief differences, asset pricing, long-run risk, recursive preferences, heterogeneous agents

JEL Classification: G11, G12

Suggested Citation

Pohl, Walt and Schmedders, Karl and Wilms, Ole, Asset Pricing with Heterogeneous Agents and Long-Run Risk (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3066637 or http://dx.doi.org/10.2139/ssrn.3066637

Walt Pohl

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

University of Zurich ( email )

Moussonstrasse 15
Z├╝rich, 8044
Switzerland

Karl Schmedders

IMD Lausanne ( email )

Lausanne, CH-1003
Switzerland
+41 (0)79 596 8956 (Phone)

Ole Wilms (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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