Heterogeneous-Agent Models in Asset Pricing: The Dynamic Programming Approach and Finite Difference Method

Galindo Gil Hamilton ()
Additional contact information
Galindo Gil Hamilton: Department of Finance and Economics, Monte Ahuja College of Business, 2564 Cleveland State University , 1860 E 18th St, Cleveland, OH 44114, USA

The B.E. Journal of Theoretical Economics, 2025, vol. 25, issue 1, 213-253

Abstract: This paper provides a detailed guide to solving a model characterized by risk-aversion heterogeneity, utilizing the dynamic programming approach in conjunction with the finite difference method. Although this model is characterized by a system of three partial differential equations (PDEs) – two related to the agents’ value functions and one to the risky asset price – it is surprisingly unnecessary to solve the full 3-PDEs system. Solving the 2-PDEs system for the agents’ value functions is sufficient, as, in equilibrium, the risky asset price is a function of these values. This problem is further simplified since each agent’s PDE can be solved independently due to the properties of the value function under constant relative risk aversion (CRRA) preferences. Finally, we demonstrate that applying the finite difference method with the implicit approach and an upwind scheme is straightforward for this type of asset pricing model.

Keywords: heterogeneous agents; preferences; asset pricing; dynamic programming; finite difference; continuous time (search for similar items in EconPapers)
JEL-codes: C02 G11 G12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejte-2024-0065 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

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: https://EconPapers.repec.org/RePEc:bpj:bejtec:v:25:y:2025:i:1:p:213-253:n:1005

Ordering information: This journal article can be ordered from
https://www.degruyte ... urnal/key/bejte/html

DOI: 10.1515/bejte-2024-0065

Access Statistics for this article

The B.E. Journal of Theoretical Economics is currently edited by Burkhard C. Schipper

More articles in The B.E. Journal of Theoretical Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().