Cross-sectional asset pricing with heterogeneous preferences and beliefs

Simon Hansen

Journal of Economic Dynamics and Control, 2015, vol. 58, issue C, 125-151

Abstract: This paper provides the theoretical foundation for studying the cross-section of stock returns in a Lucas economy populated by investors with heterogeneous preferences and beliefs. The equilibrium quantities are either derived explicitly or characterized in terms of conditional expectations well-suited for Monte-Carlo simulations. The main advantage of the simulation approach lies in its straightforward extension to many assets, which makes it possible to analyze equilibrium in economies with many fundamental assets. A numerical example shows that the model is able to generate a low level of the risk-free rate with non-negligible volatility as well as reasonable equity premia and return volatilities when sufficiently many fundamental assets are present.

Keywords: Asset pricing; Heterogeneous preferences; Heterogeneous beliefs; Cross-section (search for similar items in EconPapers)
JEL-codes: C68 D51 D58 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:58:y:2015:i:c:p:125-151

DOI: 10.1016/j.jedc.2015.06.003

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