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Cross-sectional asset pricing with heterogeneous preferences and beliefs

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  • Hansen, Simon Lysbjerg

Abstract

This paper provides the theoretical foundation for studying the cross-section of stock returns in a Lucas economy populated by investors with heterogeneous preferences and beliefs. The equilibrium quantities are either derived explicitly or characterized in terms of conditional expectations well-suited for Monte-Carlo simulations. The main advantage of the simulation approach lies in its straightforward extension to many assets, which makes it possible to analyze equilibrium in economies with many fundamental assets. A numerical example shows that the model is able to generate a low level of the risk-free rate with non-negligible volatility as well as reasonable equity premia and return volatilities when sufficiently many fundamental assets are present.

Suggested Citation

  • Hansen, Simon Lysbjerg, 2015. "Cross-sectional asset pricing with heterogeneous preferences and beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 125-151.
    • Handle: RePEc:eee:dyncon:v:58:y:2015:i:c:p:125-151
    DOI: 10.1016/j.jedc.2015.06.003
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    Cited by:

    1. Roman Frydman & Nicholas Mangee, 2021. "Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic," JRFM, MDPI, vol. 14(11), pages 1-13, November.
    2. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02312186, HAL.
    3. He, Xue-Zhong & Shi, Lei, 2017. "Index portfolio and welfare analysis under heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 64-79.
    4. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02000726, HAL.
    5. Coqueret, Guillaume, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 180-201.
    6. Shi, Lei, 2016. "Consumption-based CAPM with belief heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 30-46.
    7. Paolo Guasoni & Kwok Chuen Wong, 2020. "Asset prices in segmented and integrated markets," Finance and Stochastics, Springer, vol. 24(4), pages 939-980, October.
    8. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    9. Guillaume Coqueret, 2016. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02088097, HAL.

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    More about this item

    Keywords

    Asset pricing; Heterogeneous preferences; Heterogeneous beliefs; Cross-section;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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