Heterogeneity and limited stock market Participation

Knut Aase

No 2014/5, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. We solve the associated sup-convolution problem, and obtain explicit closed form solutions. The heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio. This results in plausible values for the preference parameters of the two agents under various assumptions for the wealth portfolio.

Keywords: The equity premium puzzle; the risk-free rate puzzle; recursive utility; the stochastic maximum principle; heterogeneity; limited market participation (search for similar items in EconPapers)
JEL-codes: D51 D53 D90 E21 G10 G12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-02-28, Revised 2015-03-25
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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