Asset pricing with heterogeneous agents and long-run risk

Walter Pohl, Karl Schmedders and Ole Wilms

Journal of Financial Economics, 2021, vol. 140, issue 3, 941-964

Abstract: This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption and wealth shares of the agents. This time variation can resolve several asset-pricing puzzles, including the large countercyclical variation of expected risk premia, the volatility of the price-dividend ratio, the predictability of cash flows and returns, and the large predictability of returns in recessions. These findings show that belief differences, a widely observed attribute of investors, significantly improve the explanatory power of long-run risk asset-pricing models.

Keywords: Asset pricing; Belief differences; Heterogeneous agents; Long-run risk; Recursive preferences (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:3:p:941-964

DOI: 10.1016/j.jfineco.2021.01.005

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