Financial Markets Equilibrium with Heterogeneous Agents. Working Paper

This paper presents an equilibrium model in a pure exchange econ-omy when investors have three possible sources of heterogeneity. In-vestors may differ in their beliefs, in their level of risk aversion and in their time preference rate. We study the impact of investors het-erogeneity on equilibrium properties. In particular, we analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at different maturities, the stock price and volatility as well as the stock’s cumulative returns, and optimal portfolio strategies. We relate the heterogeneous economy with the family of associated ho-mogeneous economies with only one class of investors. We consider cross sectional as well as long run properties.