Heterogeneous-Agent Asset Pricing
78 Pages Posted: 22 Mar 2021 Last revised: 18 Mar 2022
Date Written: March 18, 2022
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
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