Investor heterogeneity, asset pricing and volatility dynamics

David Weinbaum

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 7, pages 1379-1397

Abstract: We provide an explicit characterization of the equilibrium when investors have heterogeneous risk preferences. Given market completeness, investors can achieve full risk sharing. Thus, a representative agent can be constructed, though this agent's risk aversion changes over time as the relative wealths of the individual investors change. We show that volatility depends on the covariance of aggregate risk aversion and stock returns. We find that heterogeneity increases volatility, produces volatility clustering (ARCH effects) and "leverage"-like effects. Option prices exhibit implied volatility skews. There is predictability and we assess the magnitude of investors' hedging demands and trading volume. Further, diversity is beneficial to all agents and entails welfare gains that can be substantial.

Keywords: Asset; pricing; Preference; heterogeneity; Volatility (search for similar items in EconPapers)
Date: 2009

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6V85 ... a664c17d40113543d2af
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:7:p:1379-1397

Access Statistics for this article

Journal of Economic Dynamics and Control is edited by J. Bullard, C. Chiarella, C. H. Hommes, P. N. Ireland, T. Cogley and M. Juillard

More articles in Journal of Economic Dynamics and Control from Elsevier
Series data maintained by Heidi Boesdal ().