Live Fast, Die Young: Equilibrium and Survival in Large Economies

47 Pages Posted: 11 Jun 2020

See all articles by Arthur Beddock

Arthur Beddock

Frankfurt School of Finance & Management

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Date Written: February 12, 2020

Abstract

We model a continuous-time economy with a continuum of investors who differ both in belief and time preference rate and analyze the impact of these heterogeneities on the behavior of financial markets. In particular, we allow the two types of heterogeneity to be correlated: a negative correlation means that the most optimistic agents are also the most patient ones. We fully characterize the risk-free rate which is procyclical and the market price of risk which is countercyclical. When the two types of heterogeneity are negatively correlated, the former is higher and the latter lower compared to the standard case. A negative correlation also leads to a higher market volatility. Moreover, we find that the trading volume increases with the variance of the belief heterogeneity distribution. Finally, the surviving agent of this economy is not necessarily the one who maximizes her utility over her lifetime: a shorter life might be more rewarding than a longer one.

Keywords: Heterogeneous beliefs, Heterogeneous time preference rates, Continuum of agents, Asset pricing, Market elimination, Surviving agent

JEL Classification: D53, D90, G02, G11, G12

Suggested Citation

Beddock, Arthur and Jouini, Elyes, Live Fast, Die Young: Equilibrium and Survival in Large Economies (February 12, 2020). Economic Theory, Forthcoming, Université Paris-Dauphine Research Paper No. 3603872, Available at SSRN: https://ssrn.com/abstract=3603872

Arthur Beddock (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://https://sites.google.com/view/arthurbeddock

Elyes Jouini

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
219
PlumX Metrics