Working Paper: NBER ID: w26974
Authors: Stavros Panageas
Abstract: Does heterogeneity matter for asset pricing and in particular for risk premiums? Starting with an irrelevance result, I classify the literature into two groups of papers taking different routes to link investor heterogeneity and risk premiums. The first group contains models of investors who differ in terms of their preferences, beliefs, or access to markets. Despite their differences, these models have similar implications, and can be analyzed in a unified way. The second group of papers consists of models where investors experience uninsurable income shocks. The goal of this survey is to provide one unified framework to better understand this large literature, and especially to reconcile several of the seemingly inconsistent results found in some seminal papers.
Keywords: heterogeneity; inequality; asset pricing; risk premiums
JEL Codes: E21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investor heterogeneity (G11) | market price of risk (G19) |
| relative wealth share of different investor groups (D33) | market price of risk (G19) |
| consumption and portfolio choices of investor groups (G11) | interest rates and risk premiums (E43) |
| heterogeneity in investor characteristics (G40) | different outcomes in asset pricing (G19) |
| risk aversion of agents (D81) | risk premiums (G19) |
| changes in wealth distribution (D31) | equilibrium risk premium (D50) |
| positive aggregate shocks (E19) | market price of risk (G19) |