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- Title
First-Order Risk Aversion, Heterogeneity, and Asset Market Outcomes.
- Authors
CHAPMAN, DAVID A.; POLKOVNICHENKO, VALERY
- Abstract
We examine a wide range of two-date economies populated by heterogeneous agents with the most common forms of nonexpected utility preferences used in finance and macroeconomics. We demonstrate that the risk premium and the risk-free rate in these models are sensitive to ignoring heterogeneity. This follows because of endogenous withdrawal by nonexpected utility agents from the market for the risky asset. This finding is important precisely because these alternative preferences have frequently been proposed as possible resolutions to various asset pricing puzzles, and they have all been examined exclusively in a representative agent framework.
- Subjects
UTILITY functions; INTEREST rates; RISK premiums; MATHEMATICAL models of finance; MATHEMATICAL models; RISK
- Publication
Journal of Finance (Wiley-Blackwell), 2009, Vol 64, Issue 4, p1863
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.2009.01482.x