Asset Prices and Portfolio Choice with Heterogeneous Risk Aversion and Overlapping Generations

31 Pages Posted: 4 Mar 2021

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Junjie Guo

Central University of Finance and Economics (CUFE) - School of Finance

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: January 7, 2021

Abstract

We study an overlapping generation model with heterogeneous risk aversion. Our framework accommodates many agent types and substantially differs from an economy where agents live forever. All but one agents’ consumption shares drive the economy; thus, for a given aggregate risk aversion the real rate of interest can take many values instead of a unique one. Summarizing through the consumption share weighted variance of the risk-tolerance the rich dynamics of the model that are not captured by the aggregate risk aversion, we construct level and slope factors that do not require knowledge about agent’s risk aversion to predict excess returns.

Keywords: Heterogeneous Risk Aversion, Overlapping Generations, Consumption Share Weighted Variance of the Risk-Tolerance, Return Predictability

JEL Classification: E2, G10, G11, G12

Suggested Citation

Ehling, Paul and GUO, JUNJIE and Heyerdahl-Larsen, Christian, Asset Prices and Portfolio Choice with Heterogeneous Risk Aversion and Overlapping Generations (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3797399 or http://dx.doi.org/10.2139/ssrn.3797399

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

JUNJIE GUO (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Christian Heyerdahl-Larsen

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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