Heterogeneous Agents And Long Horizon Features Of Asset Prices
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The Long Horizon Behavior of Asset Prices in Heterogeneous Economies
| Author | : Semyon Malamud |
| Publisher | : |
| Total Pages | : 39 |
| Release | : 2006 |
| Genre | : |
| ISBN | : |
We give a complete description of long horizon behavior of asset returns in economies populated by heterogeneous agents with arbitrary discount factors and risk aversions. We find that for every type of asset there is a corresponding dominant agent who determines the long run rate of return on the asset. For example, there is a (generically) unique agent who eventually consumes everything at infinite horizon and determines the long run short term interest rate. There is another agent who determines the expected return rate on holding equity forever. There is a third agent who determines the very long end of the interest rate term structure. It is shown that a large equity premium will result if the preferences of these dominant agents are sufficiently different. The interplay between these dominant agents generates countercyclical dynamics of equity premium and conditional variance of equity returns as well as procyclical dynamics of price-dividend ratios. We obtain sharp bounds (from above and below) for the yield curve, giving a complete answer to a question posed by Dumas (1989). Surprisingly, we find that discount factors and risk aversions of the dominant agents are positively correlated, in line with existing social experiments.
Asset Prices with Heterogeneity in Preferences and Beliefs
| Author | : Harjoat Singh Bhamra |
| Publisher | : |
| Total Pages | : 74 |
| Release | : 2013 |
| Genre | : Capital assets pricing model |
| ISBN | : |
Asset Pricing Model with Heterogeneous Investment Horizons
| Author | : |
| Publisher | : |
| Total Pages | : |
| Release | : 2004 |
| Genre | : |
| ISBN | : |
In this paper we study the dynamics of a simple asset pricing model describing the trading activity of heterogeneous agents in a "stylized" market. The economy in the model contains two assets: a bond with risk-less return and a dividend paying stock. The price of the stock is determined through market clearing condition. Traders are speculators described as expected utility maximizers with heterogeneous beliefs about future stock price and with heterogeneous estimation of risk. In particular, we consider traders who base their investment decision on different time horizons and we analyze the effect of these differences on the price dynamics. Under suitable parameterization, the stock no-arbitrage "fundamental" price can emerge as a stable fixed point of the model dynamics. For different parameterizations, however, the market shows cyclical or chaotic price dynamics with speculative bubbles and crashes. We find that the sole heterogeneity of agents with respect to their time horizons is not enough to guarantee the instability of the fundamental price and the emergence of non-trivial price dynamics. However, if different groups of agents are characterized by different trading behaviors, the introduction of heterogeneous investment horizons can help to decrease the stability region of the "fundamental" fixed point. The role of time horizons turns out to be different for different trade behaviors and, in general, depends on the whole ecology of agents' beliefs. We demonstrate this effect discussing a case in which the increase of fundamentalists time horizons can lead to cyclical or chaotic price behavior, while the same increase for the chartists helps to stabilize the fundamental price. -- Asset pricing ; Heterogenous beliefs ; Investment horizons
Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents
| Author | : Kenneth L. Judd |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 2000 |
| Genre | : Stock exchanges |
| ISBN | : |
Equilibrium Theory in Infinite Dimensional Spaces
| Author | : M. Ali Khan |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 441 |
| Release | : 2013-03-09 |
| Genre | : Business & Economics |
| ISBN | : 3662070715 |
Apart from the underlying theme that all the contributions to this volume pertain to models set in an infinite dimensional space, they differ on many counts. Some were written in the early seventies while others are reports of ongoing research done especially with this volume in mind. Some are surveys of material that can, at least at this point in time, be deemed to have attained a satisfactory solution of the problem, while oth ers represent initial forays into an original and novel formulation. Some furnish alternative proofs of known, and by now, classical results, while others can be seen as groping towards and exploring formulations that have not yet reached a definitive form. The subject matter also has a wide leeway, ranging from solution concepts for economies to those for games and also including representation of preferences and discussion of purely mathematical problems, all within the rubric of choice variables belonging to an infinite dimensional space, interpreted as a commodity space or as a strategy space. Thus, this is a collective enterprise in a fairly wide sense of the term and one with the diversity of which we have interfered as little as possible. Our motivation for bringing all of this work under one set of covers was severalfold.
A Parsimonious Macroeconomic Model for Asset Pricing
| Author | : Fatih Guvenen |
| Publisher | : |
| Total Pages | : 50 |
| Release | : 2009 |
| Genre | : Assets (Accounting) |
| ISBN | : |
Abstract: In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders' aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework
Equilibrium Asset Pricing and Portfolio Choice with Heterogeneous Preferences
| Author | : Jaksa Cvitanic |
| Publisher | : |
| Total Pages | : 58 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
We study the market price of risk, the stock volatility and the hedging behavior in equilibrium of heterogeneous agents with arbitrary utility functions, consuming only at the end of the time horizon, and with the state variable following an arbitrary homogeneous diffusion process. We introduce a new notion that we call the "rate of macroeconomic fluctuations", and show hat, in equilibrium, all the quantities and strategies can be characterized in terms of the dividend volatility and the interest rate volatility discounted at this rate. We also show that both the optimal portfolio strategies and the stock price volatility can be decomposed into a myopic and a non-myopic component. The market price of risk, the myopic volatility and the myopic portfolio are determined by the present market value of future discounted volatilities of the dividend and of the interest rate. By contrast, the non-myopic volatility and non-myopic portfolio are given in terms of covariances of equilibrium quantities with the discounted dividend volatility. These representations enable us to show that, under natural cyclicality conditions, the non-myopic volatility is always positive, and the non-myopic portfolio is positive for an agent if and only if the product of his prudence and risk tolerance is less than the same product corresponding to the log agent.
'Lucas' In The Laboratory
| Author | : Elena Asparouhova |
| Publisher | : |
| Total Pages | : |
| Release | : 2013 |
| Genre | : Economics |
| ISBN | : |
This paper reports on experimental tests of an instantiation of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. Central features of the model (infinite horizon, perishability of consumption, stationarity) present difficult challenges and require a novel experimental design. The experimental evidence provides broad support for the qualitative pricing and consumption predictions of the model (prices move with fundamentals, agents smooth consumption) but sharp differences from the quantitative predictions emerge (asset prices display excess volatility, agents do not hedge price risk). Generalized Method of Moments (GMM) tests of the stochastic Euler equations yield very different conclusions depending on the instruments chosen. It is suggested that the qualitative agreement with and quantitative deviation from theoretical predictions arise from agents' expectations about future prices, which are almost self-fulfilling and yet very different from what they would need to be if they were exactly self-fulfilling (as the Lucas model requires).
Catching Up with the Joneses
| Author | : Yeung Lewis Chan |
| Publisher | : |
| Total Pages | : 36 |
| Release | : 2001 |
| Genre | : Economics |
| ISBN | : |
We analyze a general equilibrium exchange economy with a continuum of agents who have 'catching up with the Joneses' preferences and differ only with respect to the curvature of their utility functions. While individual risk aversion does not change over time, dynamic redistribution of wealth among the agents leads to countercyclical time variation in the Sharpe ratio of stock returns. We show that both the conditional risk premium and the return volatility are negatively related to the level of stock prices, as observed empirically. Therefore, our model exhibits many of the empirically observed properties of aggregate stock returns, e.g., patterns of autocorrelation in returns, the 'leverage effect' in return volatility and long-horizon return predictability. For comparison, otherwise similar representative agent economies with the same type of preferences exhibit counter-factual behavior, e.g., a constant Sharpe ratio of returns and procyclical risk premium and return volatility
