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Asset pricing with heterogeneous agents and long-run risk

Author

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  • Pohl, Walter
  • Schmedders, Karl
  • Wilms, Ole

Abstract

This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption and wealth shares of the agents. This time variation can resolve several asset-pricing puzzles, including the large countercyclical variation of expected risk premia, the volatility of the price-dividend ratio, the predictability of cash flows and returns, and the large predictability of returns in recessions. These findings show that belief differences, a widely observed attribute of investors, significantly improve the explanatory power of long-run risk asset-pricing models.

Suggested Citation

  • Pohl, Walter & Schmedders, Karl & Wilms, Ole, 2021. "Asset pricing with heterogeneous agents and long-run risk," Journal of Financial Economics, Elsevier, vol. 140(3), pages 941-964.
    • Handle: RePEc:eee:jfinec:v:140:y:2021:i:3:p:941-964
    DOI: 10.1016/j.jfineco.2021.01.005
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    3. Johnson Kakeu, 2023. "Concerns for Long-Run Risks and Natural Resource Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(4), pages 1051-1093, April.

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    More about this item

    Keywords

    Asset pricing; Belief differences; Heterogeneous agents; Long-run risk; Recursive preferences;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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