Endogenous Aggregate Beliefs: Equity Trading under Heterogeneity in Ambiguity Aversion

Irasema Alonso, Mauricio Prado

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We build a simple and tractable model of consumer heterogeneity in ambiguity aversion and use it to illustrate how asymmetric beliefs in the asset markets affect the dynamics of asset pricing, portfolio allocation, and the wealth distribution. The model is an otherwise canonical exchange-economy setting with two aggregate states of nature and two assets. The key focus is on how asset prices, when subjected to ambiguity, behave very differently in the short run than in the long run. In the short run, heterogeneity plays an important role. In the long run, belief heterogeneity persists, but the wealth distribution has evolved so that only the least ambiguity-averse investors matter for prices. As part of the short-run dynamics, the model can generate endogenous aggregate movements in non-participation—a drastic form of trading less—in response to ambiguity, with strong depressing effects on asset prices.
Original languageEnglish
JournalRevista de Economía y Finanzas
Volume2
Issue number4 (January-April)
Pages (from-to)45-60
Number of pages16
DOIs
Publication statusPublished - 2024

Keywords

  • Ambiguity aversion
  • Agent heterogeneity
  • Asset pricing
  • Portfolio choice
  • Wealth distribution

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