Asset pricing with heterogeneous agents and long-run risk

Walter Pohl, Karl Schmedders, Ole Wilms

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper shows that belief differences have strong effects on asset prices in consumption-based asset-pricing models with long-run risks. Belief heterogeneity leads to time-varying consumption and wealth shares of the agents. This time variation can resolve several asset-pricing puzzles, including the large countercyclical variation of expected risk premia, the volatility of the price--dividend ratio, the predictability of cash flows and returns, and the large predictability of returns in recessions. These findings show that belief differences, a widely observed attribute of investors, significantly improve the explanatory power of long-run risk asset-pricing models.
Original languageEnglish
JournalJournal of Financial Economics
Publication statusAccepted/In press - Mar 2020

Keywords

  • belief differences
  • asset pricing
  • long-run risk
  • recursive preferences
  • heterogeneous agents

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