Essays on equilibrium asset pricing with heterogeneous agents

My dissertation concerns the equilibrium asset pricing and its implications when agents are heterogenous. There are three chapters in the dissertation. In chapter one, I study the asset pricing implications of default in an equilibrium model with incomplete markets. Defaultable debt is not redundant in my model since markets are incomplete and agents suffer a utility penalty when they default. I find that, compared to the standard incomplete markets model, the equity premium is larger in my model. I also consider the effects of a decrease in the default penalty and an increase in income inequality. Both increase default rates and thus, provide possible explanations for the rapid increase in personal bankruptcies during the 1990s. Because these two effects have different implications for asset prices, this type of model may help to distinguish between the causes of the increasing number of bankruptcies. In chapter two, I propose a new dynamic general equilibrium model for defaultable bonds in an incomplete market setting as in Basak and Cuoco (1998). Agents trade a riskless bond and a long-lived defaultable bond. They suffer utility loss when they default. Defaultable debt is not redundant in this model, in contrast to the traditional structural model, and it is used to complete the market. Close-form solutions are obtained for the case that borrowers are already in financial distress so they always default a little. Compared with the model in Basak and Cuoco (1998), here a defaultable bond is more like a stock and the risk-free rate is deterministic. In chapter three, I study the effects on the equity premium with asymmetric information. Motivated by Abel (1990) on the effects of heterogeneous beliefs about asset payoffs on the risk premium, this paper extends the model to a dynamic setting with asymmetric information. To prevent agents from learning the true payoff from the equilibrium price, I introduce uncertainty about the distribution of risk aversion. In a setup similar to that in Wang (1993)(1994), I show that in equilibrium the price function is a linear function of beliefs about the payoff and the aggregate risk aversion. The results from Abel (1990) hold in the dynamic setting, namely heterogeneity in the beliefs about payoffs will increase the risk premium