A Dynamic Asset Pricing Model with Non-myopic Traders

Zhao Han

Economics Bulletin, 2015, vol. 35, issue 3, 1788-1794

Abstract: Dynamic asset pricing models built within the classic CARA-Normal framework usually assume myopic traders with one-period investment horizons or infinitely lived investors for tractability. I relax this myopic assumption and show the values of more finite trading opportunities are state-contingent and arise naturally as non-central $chi^2$-distributed. The moment generating function of the non-central $chi^2$ distribution thus can be utilized to derive the traders' first order conditions and preserve closed-form solutions. The model with non-myopic traders has a modified two-period overlapping generations(OLG) interpretation in which each young generation can have multiple investment opportunities.

Keywords: Investment Horizons; Non-central $chi^2$ Distribution; Overlapping Generations Model (search for similar items in EconPapers)
JEL-codes: C6 G1 (search for similar items in EconPapers)
Date: 2015-08-21
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