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Construction of an aggregate consistent utility, without Pareto optimality. Application to Long-Term yield curve Modeling

Author

Listed:
  • Nicole El Karoui

    (LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique)

  • Caroline Hillairet

    (ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique)

  • Mohamed Mrad

    (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8 Vincennes-Saint-Denis - UP13 - Université Paris 13 - Institut Galilée - CNRS - Centre National de la Recherche Scientifique)

Abstract

The aim of this paper is to describe globally the behavior and preferences of heterogeneous agents. Our starting point is the global wealth of the economy, with a given repartition of the wealth among investors, which is not necessarily Pareto optimal. We propose a construction of an aggregate forward utility, market consistent, that aggregates the marginal utility of the heterogeneous agents. This construction is based on the aggregation of the pricing kernels of each investor. As an application we analyze the impact of the heterogeneity and of the global wealth market on the yield curve.

Suggested Citation

  • Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2019. "Construction of an aggregate consistent utility, without Pareto optimality. Application to Long-Term yield curve Modeling," Post-Print hal-01721441, HAL.
    • Handle: RePEc:hal:journl:hal-01721441
    Note: View the original document on HAL open archive server: https://hal.science/hal-01721441v1
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    References listed on IDEAS

    as
    1. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    2. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2017. "Consistent Utility of Investment and Consumption : a forward/backward SPDE viewpoint," Working Papers 2017-74, Center for Research in Economics and Statistics.
    3. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    4. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Ramsey Rule with Progressive Utility in Long Term Yield Curves Modeling," Papers 1404.1895, arXiv.org.
    5. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2014. "Affine long term yield curves: An application of the Ramsey rule with progressive utility," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-24.
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    8. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    9. Nicole El Karoui & Caroline Hillairet & Mohamed Mrad, 2017. "Consistent Utility of Investment and Consumption : a forward/backward SPDE viewpoint ," Working Papers hal-01458419, HAL.
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