Heterogeneous Households under Uncertainty

Pietro Veronesi

No 25448, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I characterize a dynamic economy under general distributions of households’ risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households’ wealth display a higher CAPM beta; and (d) households’ portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.

JEL-codes: E21 G1 G11 G12 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-mac and nep-upt
Note: AP
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Citations: View citations in EconPapers (2)

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