Preference evolution and the dynamics of capital markets

Giuliano Curatola

No 128, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper introduces endogenous preference evolution into a Lucas-type economy and explores its consequences for investors' trading strategy and the dynamics of asset prices. In equilibrium, investors herd and hold the same portfolio of risky assets which is biased toward stocks of sectors that produce a socially preferred good. Price-dividend ratios, expected returns and return volatility are all time varying. In this way, preference evolution helps rationalize the observed under-performance and local biases of investors' portfolios and many empirical regularities of stock returns such a time variation, the value-growth effect and stochastic volatility.

Keywords: asset pricing; general equilibrium; heterogeneous investors; interdependent preferences; portfolio choice (search for similar items in EconPapers)
JEL-codes: D51 D91 E20 G12 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:128

DOI: 10.2139/ssrn.2747269

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