The Dynamics of Heterogeneity and Asset Prices

Walter Farkas and Ciprian Necula
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Walter Farkas: University of Zurich, ETH Zurich, and Swiss Finance Institute

No 17-76, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In the context of a continuous-time pure-exchange economy model, the paper develops a novel methodology, based on measure-valued stochastic processes, for analyzing the evolution of heterogeneity in a tractable manner and studying its impact on asset prices. The agents in the economy differ with respect to impatience, risk aversion, beliefs about the growth rate of output, and to the rules for updating beliefs. The heterogeneity itself is described by a single object, a measure, and its dynamics by a measure-valued stochastic process. A key contribution of the paper consists in obtaining a closed form formula for the stock price in the case in which preferences are homogeneous with the risk aversion parameter given by a natural number. We also synthesize and generalize existing results about the equilibrium in heterogeneous pure-exchange complete markets economies and we highlight the importance of the endogenously determined risk tolerance weighted consumption distribution as a key ingredient in driving the equilibrium variables.

Keywords: heterogeneity; asset prices; beliefs; pure-exchange economy; measure-valued stochastic process (search for similar items in EconPapers)
JEL-codes: D51 D53 D91 G12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2017-04
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1776

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