Asset Prices and Portfolio Choice with Heterogeneous Risk Aversion and Overlapping Generations
31 Pages Posted: 4 Mar 2021
Date Written: January 7, 2021
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
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