The Composition of Market Participants and Asset Dynamics

98 Pages Posted: 6 Apr 2019 Last revised: 22 Nov 2022

See all articles by Chanik Jo

Chanik Jo

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: November 22, 2022

Abstract

We develop a dynamic equilibrium model where heterogeneous investors endogenously choose to enter/exit the stock market. We characterize the equilibrium and present a conditional consumption-CAPM. The model implies small changes in the composition of stockholders, which generate a strongly countercyclical stockholders’ amount of consumption risk. The model provides a new perspective on the main drivers of asset dynamics. It is the procyclical consumption risk-sharing implied by changes in stockholders' composition that contributes to the dynamics of risk premium, excess volatility, and price-dividend ratio. We provide empirical evidence on market participation, amount of risk, and price of risk, supporting our theory.

Keywords: time-varying composition of stockholders, consumption risk, heterogeneous investors, conditional consumption-based asset pricing, labor income, recursive utility

JEL Classification: G11, G12, G17

Suggested Citation

Jo, Chanik, The Composition of Market Participants and Asset Dynamics (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=3349840 or http://dx.doi.org/10.2139/ssrn.3349840

Chanik Jo (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

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