Heterogeneous Preferences and the Representative Investor

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: In this paper, I examine an inter-temporal exchange economy with a complete financial market. The economy is populated by two heterogeneous investors who differ from each other in their attitudes towards risk. In such a model, a single representative agent can be created who generates the same asset prices as those generated by the heterogeneous agents. I analyze the relationship between the preferences of the heterogeneous agents and the preference of the corresponding representative agent and find that the less risk averse agent influences the prices of the contingent claims more than the more risk averse one - even if the more risk averse agent holds most of the contingent consumption in one state of nature.

Keywords: Contingent pricing; Heterogeneous agents (search for similar items in EconPapers)
Pages: 19 pages
Date: 2003-12
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Working Paper: Heterogeneous Preferences and the Representative Investor (2002)
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