Heterogeneous-Agent Asset Pricing

78 Pages Posted: 22 Mar 2021 Last revised: 18 Mar 2022

See all articles by James D. Paron

James D. Paron

University of Pennsylvania - Finance Department

Date Written: March 18, 2022

Abstract

This paper studies the importance of idiosyncratic endowment shocks for aggregate asset prices in continuous time. My generalized framework accommodates jumps and heterogeneous recursive preferences. I show that countercyclical cross-sectional risk is irrelevant to risk premia if and only if all agents have identical, time-additive power utility and cross-sectional risk is uncorrelated with aggregate consumption risk. It always affects the riskfree rate and equity volatility. I calibrate a general-equilibrium model in which numerous agents face uninsurable idiosyncratic human-capital disasters. Using Social Security Administration income data, I show that time-varying cross-sectional income skewness is an important driver of asset price dynamics.

Keywords: Asset pricing, Incomplete markets, Heterogeneous agents, Human capital

JEL Classification: E21, E24, E32, E44, G11, G12, J24

Suggested Citation

Paron, James, Heterogeneous-Agent Asset Pricing (March 18, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, 2021, Available at SSRN: https://ssrn.com/abstract=3807456 or http://dx.doi.org/10.2139/ssrn.3807456

James Paron (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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