Asset Prices with Wealth Dispersion

31 Pages Posted: 4 Mar 2021 Last revised: 6 Oct 2021

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Junjie Guo

Central University of Finance and Economics (CUFE) - School of Finance

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: January 7, 2021

Abstract

With overlapping generations and heterogeneous risk aversion there is no unique relation between aggregate risk aversion and the real rate of interest, and this type of endogenous “noise” cannot arise in an economy where agents live forever. Our framework accommodates many agent types and the noise emerges precisely because all (but one) consumption shares drive the economy. Adding wealth dispersion to aggregate risk aversion sufficiently summarizes the rich dynamics of the model. Consistent with the model, we construct “level” and “slope” factors that do not require knowledge about agents’ risk aversion to predict excess returns.

Keywords: Heterogeneous Risk Aversion, Overlapping Generations, Consumption Share Weighted Variance of the Risk-Tolerance, Return Predictability

JEL Classification: E2, G10, G11, G12

Suggested Citation

Ehling, Paul and Guo, Junjie and Heyerdahl-Larsen, Christian, Asset Prices with Wealth Dispersion (January 7, 2021). Kelley School of Business Research Paper No. 2021-12, Available at SSRN: https://ssrn.com/abstract=3797399 or http://dx.doi.org/10.2139/ssrn.3797399

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

Junjie Guo (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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