Financial Markets Equilibrium with Heterogeneous Agents

This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion, and in their time preference rate. The authors study the impact of investors' heterogeneity on equilibrium properties and, in particular, on 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 on the stock's cumulative returns, and optimal portfolio strategies. The authors relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. Cross-sectional as well as long-run properties are analyzed.