Asset Prices, Funds' Size and Portfolio Weights in Equilibrium with Heterogeneous and Long-Lived Funds

60 Pages Posted: 16 Feb 2009

See all articles by Jaksa Cvitanic

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2009

Abstract

We perform a detailed asymptotic analysis of the equilibrium behavior of the asset prices, wealth size and portfolio weights in complete markets equilibria, with long-lived funds. In equilibrium, the fund with the (closest to) log preference will dominate the other funds in size, in the long-run, with probability one. On the other hand, two funds on the opposite sides of the log preference will never dominate each other in expected size. In the very long run, the price behavior of the risky asset will be determined solely by the fund closest to the log preference. However, the price drift and volatility still are affected by higher risk aversions, and the optimal portfolio weights contain a hedging component, positive (negative) for the risk aversions higher (lower) than log. The hedging component is monotone increasing in risk aversion for the times further away from the terminal horizon, but it may become monotone decreasing closer to the terminal horizon. For earlier, but still asymptotically infinite times, the price behavior is impacted also by the funds with risk aversions greater than one. Selling short is never optimal. There are distinct increasing time periods such that the price has the same asymptotic behavior in each period. The long-run per-period return gets lower with time.

Keywords: Asset pricing, equilibrium, heterogeneous agents

JEL Classification: D53, G11, G12

Suggested Citation

Cvitanic, Jaksa and Malamud, Semyon, Asset Prices, Funds' Size and Portfolio Weights in Equilibrium with Heterogeneous and Long-Lived Funds (January 15, 2009). Swiss Finance Institute Research Paper No. 09-03, Available at SSRN: https://ssrn.com/abstract=1344257 or http://dx.doi.org/10.2139/ssrn.1344257

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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