The Implications of Heterogeneity and Inequality for Asset Pricing

Abstract

Does heterogeneity matter for asset pricing? Starting with an irrelevance result, I classify the literature into two groups of papers taking different routes to make heterogeneity relevant for asset prices. The first group discusses models of investors who differ in terms of their preferences, beliefs, or access to markets. Despite their differences, these models have similar implications, and can be analyzed in a unified way. The second group of papers consists of models with investors experiencing uninsurable income shocks. I show that despite arriving at seemingly inconsistent conclusions, there is a common thread and a way to reconcile the results of this strand of the literature.

Keywords: Heterogeneous Agents, Heterogeneous preferences, Heterogeneous beliefs, Financial constraints, Incomplete Markets, Overlapping generations

JEL Classification: G1