Results 1  10
of
11
Financial Markets Equilibrium with Heterogenous Agents, Review of Finance, forthcoming
, 2011
"... This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion and in their time preference rate. We study the impact of investors heterogeneity on the properties ..."
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Cited by 21 (1 self)
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This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion and in their time preference rate. We study the impact of investors heterogeneity on the properties of the equilibrium. In particular, we analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at different maturities, the stock price and volatility as well as the stock’s cumulative returns, and optimal portfolio strategies. We relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. We consider cross sectional as well as asymptotic properties.
Catching up with the Joneses under preference heterogeneity: an exact solution
"... This paper analyses a continuoustime pureexchange economy of the Lucas type, populated with agents equipped with catching up with the Jonesespreferences and heterogeneous in their relative risk aversion. Aggregate consumption has stochastic drift and volatility, as in the longrun risk literature. ..."
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This paper analyses a continuoustime pureexchange economy of the Lucas type, populated with agents equipped with catching up with the Jonesespreferences and heterogeneous in their relative risk aversion. Aggregate consumption has stochastic drift and volatility, as in the longrun risk literature. Under a speci
c but realistic pattern of heterogeneity, we solve in closed form for many equilibrium quantities, including the moments of stock returns and the optimal stock allocation across agents. Analytical solutions allow for a deep analysis of the role of habit formation, preference heterogeneity and timevariation in exogenous uncertainty on the dynamics of asset prices. We
nd that habit formation together with a more general dynamics of the aggregate consumption helps replicating various empirical properties of both conditional and unconditional moments of asset prices. We also characterize the e¤ect of habit formation on the optimal stock allocation and the resulting trading volume and we show that preference heterogeneity leads to the countercyclical dynamics of turnover.
Asset Pricing and the One Percent∗
, 2014
"... We find that when the income share of the top 1 % income earners in the U.S. rises above trend by one percentage point, subsequent one year market excess returns decline on average by 5.6%. This negative relation remains strong and significant even when controlling for classic return predictors such ..."
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We find that when the income share of the top 1 % income earners in the U.S. rises above trend by one percentage point, subsequent one year market excess returns decline on average by 5.6%. This negative relation remains strong and significant even when controlling for classic return predictors such as the pricedividend and the consumptionwealth ratios. To explain this stylized fact, we build a general equilibrium asset pricing model with heterogeneity in wealth and risk aversion across agents. Our model admits a testable moment condition and a novel two factor covariance pricing formula, where one factor is inequality. Intuitively, when wealth shifts into the hands of rich and risk tolerant agents, average risk aversion falls, pushing down the risk premium. Our model is broadly consistent with data and provides a novel positive explanation of both market excess returns over time and the cross section of returns across stocks.
Term Structure Models and Differences in Beliefs
"... This paper studies the empirical implications of models with heterogeneous beliefs for the term structure of interest rates. When agents use different models to forecast the economy, they naturally engage in speculative trading, which in turn generates endogenously timevarying prices of risk. Endog ..."
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This paper studies the empirical implications of models with heterogeneous beliefs for the term structure of interest rates. When agents use different models to forecast the economy, they naturally engage in speculative trading, which in turn generates endogenously timevarying prices of risk. Endogeneous risk has tight implications for equilibrium yield curves which we investigate empirically. We study a set of testable restrictions that help distinguish across myopic, speculative, and risk sharing models. Our results show that speculative models help to explain, at the same time, low short term interest rates, bond return predictability, yield curve forecasting factors, realised volatility, and compensation for Treasury volatility risk.
Macroeconomic Uncertainty, Difference in Beliefs,
"... In this paper we study empirically the implications of macroeconomic disagreement for the time variation in bond market risk premia. If there is a source of heterogeneity in the belief structure of the economy then differences in beliefs can affect equilibrium asset prices, and the dynamics of disag ..."
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In this paper we study empirically the implications of macroeconomic disagreement for the time variation in bond market risk premia. If there is a source of heterogeneity in the belief structure of the economy then differences in beliefs can affect equilibrium asset prices, and the dynamics of disagreement may generate a source of predictable variation in excess bond returns. Using survey data on macroeconomic forecasts of fundamentals spanning interest rates, real aggregates and inflation variables at different horizons we propose a new empirically observable proxy to aggregate macroeconomic disagreement and find a number of novel results. First, consistent with a general equilibrium model, heterogeneity in beliefs affects the price of risk so that disagreement regarding the real economy, inflation, short, and long ends of the yield curve explain excess bond returns with R 2 between 22% 29%. Second, we show that macroeconomic disagreement is exogenous to time t price innovations. Third, disagreement not only contains information on expected bond returns, but also contains significant information on expected changes in future interest rates: the combination of disagreement and the forward slope predict 1year changes in the spot rate with an R 2
Asset Pricing when This Time is Different
, 2015
"... Recent evidence suggests that the young update beliefs about macro outcomes more in response to aggregate shocks than the old. We embed this experiential learning bias in a general equilibrium macrofinance model where agents have recursive preferences and are unsure about the specification of the e ..."
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Recent evidence suggests that the young update beliefs about macro outcomes more in response to aggregate shocks than the old. We embed this experiential learning bias in a general equilibrium macrofinance model where agents have recursive preferences and are unsure about the specification of the exogenous aggregate stochastic process. The departure from rational expectations is small in a statistical sense, but generates quantitatively significant increases in risk, as well as substantial and persistent aggregate overand undervaluation. Consistent with the model, the pricedividend ratio is empirically more sensitive to macro shocks when the proportion of young vs. old is high.
is given to the source. Income Inequality and Asset Prices under Redistributive Taxation
, 2015
"... This paper was presented at the November 2015 CarnegieRochesterNYU Conference on Public Policy. The views in this paper are the responsibility of the authors, not the institutions they are affiliated with. ..."
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This paper was presented at the November 2015 CarnegieRochesterNYU Conference on Public Policy. The views in this paper are the responsibility of the authors, not the institutions they are affiliated with.
Expectational Coordination and the Stock Market
, 2014
"... Abstract We estimate a behavioural heterogeneous agents model with boundedly rational traders who know the fundamental stock price, but disagree about the persistence of deviations from the fundamental. Some agents (fundamentalists) believe in meanreversion of stock prices, while others (chartists ..."
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Abstract We estimate a behavioural heterogeneous agents model with boundedly rational traders who know the fundamental stock price, but disagree about the persistence of deviations from the fundamental. Some agents (fundamentalists) believe in meanreversion of stock prices, while others (chartists) expect a continuation of the trend. Agents gradually switch between the two rules, based upon their relative performance, leading to selfreinforcing regimes of meanreversion and trendfollowing. For the fundamental benchmark price we use two wellknown models, the Gordon model with a constant risk premium and the CampbellCochrane consumptionhabit model with a timevarying risk premium. We estimate a twotype switching model using U.S. stock prices until 2012Q4. The estimations show an improvement over representative agent models that is both statistically and economically significant. Our model suggests that behavioural regime switching strongly amplifies booms and busts, in particular, the dotcom bubble and the financial crisis in 2008.