General Equilibrium with Unhedgeable Fundamentals and Heterogeneous Agents
51 Pages Posted: 4 Apr 2022 Last revised: 30 Jan 2023
Date Written: March 14, 2022
We solve a general equilibrium model in which aggregate consumption has uninsurable growth shocks, rendering the market dynamically incomplete. Several long-lived agents with heterogeneous risk-aversion and time-preference make consumption and investment decisions, trading risky assets and borrowing from and lending to each other. For small growth fluctuations, we obtain closed-form expressions for stock prices, interest rates, and consumption and trading policies. Agents' stochastic discount factors depend on the history of unhedgeable shocks, agents trade assets dynamically, and the dispersion of agents' preferences impacts both the interest rate and asset prices, hence no representative agent exists.
Keywords: equilibrium, incomplete markets, heterogeneous preferences, continuous time
JEL Classification: D52, D51
Suggested Citation: Suggested Citation