Heterogeneous Preferences On The Basis Of Different Relative Risk Aversion And Dynamic Asset Pricing

Traditional asset pricing theories can not explain some anomalies of the financial market, such as"the equity premium puzzle"and"the risk-free rate puzzle", etc. This theoretic inadequacy, however, urges the arrival of new asset pricing theories, which try to explain the puzzles from the angle of the investors'subjective behaviors or the investors'heterogeneity. This thesis, by combining the investors'subjective behaviors and heterogeneity, features their heterogeneous preference structures with different coefficients of relative risk aversion and identical time discount factor in a continuous-time, finite-horizon, pure exchange economy and thus derives the equilibrium price equations of assets. On this basis, I analyze the effects of heterogeneous preferences on equilibrium asset prices and return behaviors and compare them with the results in homogeneous circumstance. Below are the major conclusions:Stock price, bond price and instant rate are determined by the distribution of aggregate consumption across investors but not influenced by individual investor's consumption. When the economy is structured by one single homogeneous investor, the equilibrium stock price is determined by the aggregate consumption; bond price is determined by the expected aggregate consumption growth; instant rate is a fixed constant. The equity premium per unit of risk and the instant rate are related to the distribution of aggregate consumption across investors. When compared with the homogeneity, the preferences heterogeneity increases the volatility of equity premium per unit of risk and instant rate. The variation of time discount factor's influence on the volatility of instant rate is mainly determined by the time discount factor itself. These conclusions all contribute to explain"the equity premium puzzle"and"the risk-free rate puzzle".