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Survival and Long-Run Dynamics with Heterogeneous Beliefs under Recursive Preferences

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  • Jaroslav Borovička

Abstract

I analytically characterize the long-run behavior of an economy with two types of agents who differ in their beliefs and are endowed with homothetic recursive preferences. Agents with more incorrect beliefs dominate, or agents with different accuracy of their beliefs coexist in the long run, for broad ranges of plausible parameterizations when risk aversion is greater than the inverse of the intertemporal elasticity of substitution. The results highlight a crucial interaction between risk sharing, speculative behavior and consumption-saving choice of agents with heterogeneous beliefs, and the role of equilibrium prices in shaping long-run outcomes.

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  • Jaroslav Borovička, 2020. "Survival and Long-Run Dynamics with Heterogeneous Beliefs under Recursive Preferences," Journal of Political Economy, University of Chicago Press, vol. 128(1), pages 206-251.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/704072
    DOI: 10.1086/704072
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    4. Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
    5. Byrne, Joseph P & Ibrahim, Boulis Maher & Zong, Xiaoyu, 2020. "Asset Prices and Capital Share Risks: Theory and Evidence," MPRA Paper 101781, University Library of Munich, Germany.
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    9. Fu, Jie & Zhang, Xiaoqi & Zhou, Wenyuan & Lyu, Yang, 2024. "A continuous heterogeneous agent model for multi-asset pricing and portfolio construction under market matching friction," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 267-283.
    10. Guan, Guohui & Hu, Xiang, 2022. "Equilibrium mean–variance reinsurance and investment strategies for a general insurance company under smooth ambiguity," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    11. Croitoru, Benjamin & Jiao, Feng & Lu, Lei, 2024. "Nominal exchange rates and heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 166(C).
    12. 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.
    13. Branger, Nicole & Konermann, Patrick & Schlag, Christian, 2019. "Optimists and pessimists in (in)complete markets," SAFE Working Paper Series 252, Leibniz Institute for Financial Research SAFE.
    14. Mikhail Zhitlukhin, 2022. "A continuous-time asset market game with short-lived assets," Finance and Stochastics, Springer, vol. 26(3), pages 587-630, July.
    15. Sheng, Jiliang & Xu, Si & An, Yunbi & Yang, Jun, 2022. "Dynamic asset pricing in delegated investment: An investigation from the perspective of heterogeneous beliefs of institutional and retail investors," Economic Modelling, Elsevier, vol. 107(C).
    16. Bottazzi, Giulio & Dindo, Pietro, 2022. "Drift criteria for persistence of discrete stochastic processes on the line," Journal of Mathematical Economics, Elsevier, vol. 101(C).
    17. Li, Kai & Liu, Jun, 2023. "Extrapolative asset pricing," Journal of Economic Theory, Elsevier, vol. 210(C).

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