Financial Markets Equilibrium with Heterogeneous Agents
56 Pages Posted: 10 Dec 2009
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Financial Markets Equilibrium with Heterogeneous Agents
Date Written: December 3, 2009
Abstract
This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion and in their time preference rate. We study the impact of investors heterogeneity on the properties of the equilibrium. In particular, we analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at dierent maturities, the stock price and volatility as well as the stock's cumulative returns, and optimal portfolio strategies. We relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. We consider cross sectional as well as asymptotic properties.
Keywords: equilibrium, heterogeneous agents, volatility, optimal portfolios, survival, yield curve, long yield
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation
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