Journal Article

Asset Prices with Heterogeneity in Preferences and Beliefs

Harjoat S. Bhamra and Raman Uppal

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 27, issue 2, pages 519-580
Published in print February 2014 | ISSN: 0893-9454
Published online August 2013 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hht051
Asset Prices with Heterogeneity in Preferences and Beliefs

More Like This

Show all results sharing these subjects:

  • Economics
  • General Equilibrium and Disequilibrium
  • Financial Markets
  • Intertemporal Choice and Growth

GO

Show Summary Details

Preview

In this paper, we study asset prices in a dynamic, continuous-time, and general-equilibrium endowment economy in which agents have “catching up with the Joneses” utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the state-price density, the risk-free interest rate and market price of risk, the stock price, equity risk premium, and volatility of stock returns, the term structure of interest rates, and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general in that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.

Keywords: G12; D51; D53; D91

Journal Article.  28001 words. 

Subjects: Economics ; General Equilibrium and Disequilibrium ; Financial Markets ; Intertemporal Choice and Growth

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.