 General equilibrium with unhedgeable fundamentals and heterogeneous agentsPaolo Guasoni and Marko Hans Weber Journal of Economic Theory, 2025, vol. 224, issue C Abstract: This paper examines the implications of unhedgeable fundamental risk, combined with agents' heterogeneous preferences and wealth allocations, on dynamic asset pricing and portfolio choice. We solve in closed form a continuous-time general equilibrium model in which unhedgeable fundamental risk affects aggregate consumption dynamics, rendering the market incomplete. Several long-lived agents with heterogeneous risk-aversion and time-preference make consumption and investment decisions, trading risky assets and borrowing from and lending to each other. We find that a representative agent does not exist. Agents trade assets dynamically. Their consumption rates depend on the history of unhedgeable shocks. Consumption volatility is higher for agents with preferences and wealth allocations deviating more from the average. Unhedgeable risk reduces the equilibrium interest rate only through agents' heterogeneity and proportionally to the cross-sectional variance of agents' preferences and allocations. Keywords: Equilibrium; Incomplete markets; Heterogeneous preferences; Continuous time (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:224:y:2025:i:c:s0022053125000249 DOI: 10.1016/j.jet.2025.105978 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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