Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098281 | Journal of Economic Dynamics and Control | 2015 | 27 Pages |
Abstract
This paper provides the theoretical foundation for studying the cross-section of stock returns in a Lucas economy populated by investors with heterogeneous preferences and beliefs. The equilibrium quantities are either derived explicitly or characterized in terms of conditional expectations well-suited for Monte-Carlo simulations. The main advantage of the simulation approach lies in its straightforward extension to many assets, which makes it possible to analyze equilibrium in economies with many fundamental assets. A numerical example shows that the model is able to generate a low level of the risk-free rate with non-negligible volatility as well as reasonable equity premia and return volatilities when sufficiently many fundamental assets are present.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Simon Lysbjerg Hansen,