Heterogeneity of Investors and Asset Pricing on a Risk-Value World

52 Pages Posted: 13 Jun 2002  

Guenter Franke

University of Konstanz - Department of Economics

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

Portfolio choice and the implied asset pricing are usually derived assuming maximization of expected utility. In this paper, they are derived from risk-value models which generalize the Markowitz-model. We use a behaviorally based risk measure with an endogenous or exogenous benchmark. A richer set of sharing rules is obtained than in an expected utility world. If the risk measure is modelled by a negative HARA-function, then sharing rules are convex or concave relative to each other. The pricing kernel convexity increases with heterogeneity of investors making claims contingent on states of high and low aggregate payo more expensive. An increase in heterogeneity raises investors' needs for trading options and also makes all European options more expensive relative to the price of the underlying asset.

Keywords: Decision Making Under Risk, Asset Pricing, Convexity of Pricing Kernel, Heterogeneity of Investors

JEL Classification: D81, G11, G12, G13

Suggested Citation

Franke, Guenter and Weber, Martin, Heterogeneity of Investors and Asset Pricing on a Risk-Value World (April 2002). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=313979 or http://dx.doi.org/10.2139/ssrn.313979

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

Martin Weber

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

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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