Asset pricing with dynamically inconsistent agents

Mariana Khapko ()
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Mariana Khapko: University of Toronto Scarborough

Finance and Stochastics, 2023, vol. 27, issue 4, No 8, 1017-1046

Abstract: Abstract This paper investigates an endowment economy featuring dynamically inconsistent preferences. Taking a game-theoretic approach, the paper provides an explicit characterisation of the market equilibrium, including the equilibrium short rate, the equilibrium market price of risk and the equilibrium stochastic discount factor. The general results are applied to models featuring non-exponential discounting and state-dependent risk aversion. The findings underscore the significance of incorporating dynamically inconsistent preferences into economic models and offer a framework for analysing them in the context of asset pricing.

Keywords: Time inconsistency; Equilibrium; Asset pricing; Non-exponential discounting; State-dependent risk aversion; 91A10; 91A80; 91B50; 91B70; 91G80 (search for similar items in EconPapers)
JEL-codes: C72 D51 D53 G10 G12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00780-023-00516-y

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