Asset Pricing with Heterogeneous Agents and Long-Run Risk
76 Pages Posted: 9 Nov 2017 Last revised: 5 Nov 2020
Date Written: September 19, 2018
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: Suggested Citation