General Equilibrium with Unhedgeable Fundamentals and Heterogeneous Agents

51 Pages Posted: 4 Apr 2022 Last revised: 30 Jan 2023

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Marko Weber

National University of Singapore (NUS) - Department of Mathematics

Date Written: March 14, 2022

Abstract

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

Guasoni, Paolo and Guasoni, Paolo and Weber, Marko, General Equilibrium with Unhedgeable Fundamentals and Heterogeneous Agents (March 14, 2022). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 22-6, Available at SSRN: https://ssrn.com/abstract=4057156 or http://dx.doi.org/10.2139/ssrn.4057156

Paolo Guasoni

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Marko Weber (Contact Author)

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

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