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Equity Premium: Interaction of Belief Heterogeneity and Distribution of Wealth?

Filippo Taddei

No 67, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Introducing heterogeneity of beliefs across different agents builds a link between wealth distribution and the equity premium. We demonstrate that an economy populated only by risk neutral agents may nonetheless display a strictly positive equity premium. We then place our notion of belief heterogeneity within the popular representative agent construct. We show that any level of belief heterogeneity in the multi agent economy can be mapped into some specific degree of risk aversion of the representative agent economy that keeps equilibrium prices constant. A fully dynamic model follows. Finally, we suggest an explanation for the recent behavior of the equity premium: a story of "heterogeneous optimism" versus "homogeneous pessimism" is presented.

Keywords: Belief Heterogeneity; Equity Premium Puzzle; Representative Agent; Risk Aversion; Wealth Distribution. (search for similar items in EconPapers)
JEL-codes: D31 D51 D84 G12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007
New Economics Papers: this item is included in nep-dge and nep-upt
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