A representative agent asset pricing model with heterogeneous beliefs and recursive utility

Masataka Suzuki

International Review of Economics & Finance, 2016, vol. 45, issue C, 298-315

Abstract: In this paper, we consider a continuous-time pure exchange economy with multiple agents whose preferences are represented by a time-inseparable recursive utility. Agents are homogeneous in their preferences, but heterogeneous in their beliefs regarding the drift rate of the aggregate endowment process. Given a competitive equilibrium in this economy, we construct a tractable representative agent model that would approximate asset prices in the original multiple agents economy. We show that our model helps resolve many asset pricing puzzles, such as the equity premium puzzle, equity volatility puzzle, risk-free rate puzzle, and term premium puzzle.

Keywords: Heterogeneous beliefs; Recursive utility; Equity premium; Equity volatility; Yield curve (search for similar items in EconPapers)
JEL-codes: E43 G12 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:45:y:2016:i:c:p:298-315

DOI: 10.1016/j.iref.2016.06.009

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