Heterogeneity of Investors and Asset Pricing on a Risk-Value World

59 Pages Posted: 13 May 2003

See all articles by Guenter Franke

Guenter Franke

University of Konstanz - Department of Economics

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2003

Abstract

Portfolio choice and the implied asset pricing are usually derived assuming maximization of expected utility. In this Paper, they are derived from risk-value models that generalize the Markowitz-model. We use a behaviourally based risk measure with an endogenous or exogenous benchmark. If the risk measure is modelled by a negative HARA-function, then sharing rules are convex or concave relative to each other. A measure of heterogeneity of investors is derived. More heterogeneity (a) raises convexity/concavity of sharing rules and, thus, the need of investors to trade options, (b) increases convexity of the pricing kernel, (c) raises option prices relative to the price of the under-lying asset and (d) raises the variance and kurtosis of the risk-neutral probability distribution of the aggregate pay-off.

Keywords: Heterogeneity of investors, asset pricing, decision-making under risk, convexity of pricing kernel

JEL Classification: D81, G11, G12, G13

Suggested Citation

Franke, Guenter and Weber, Martin, Heterogeneity of Investors and Asset Pricing on a Risk-Value World (March 2003). Available at SSRN: https://ssrn.com/abstract=407121

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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