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Asset pricing with dynamically inconsistent agents

Author

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  • Mariana Khapko

    (University of Toronto Scarborough
    University of Toronto)

Abstract

This paper investigates an endowment economy featuring dynamically inconsistent preferences. Taking a game-theoretic approach, the paper provides an explicit characterisation of the market equilibrium, including the equilibrium short rate, the equilibrium market price of risk and the equilibrium stochastic discount factor. The general results are applied to models featuring non-exponential discounting and state-dependent risk aversion. The findings underscore the significance of incorporating dynamically inconsistent preferences into economic models and offer a framework for analysing them in the context of asset pricing.

Suggested Citation

  • Mariana Khapko, 2023. "Asset pricing with dynamically inconsistent agents," Finance and Stochastics, Springer, vol. 27(4), pages 1017-1046, October.
    • Handle: RePEc:spr:finsto:v:27:y:2023:i:4:d:10.1007_s00780-023-00516-y
    DOI: 10.1007/s00780-023-00516-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Time inconsistency; Equilibrium; Asset pricing; Non-exponential discounting; State-dependent risk aversion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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