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Financial Markets Equilibrium With Heterogeneous Agents

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Executive Summary

This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion and in their time preference rate. The authors study the impact of investors' heterogeneity on the properties of the equilibrium. In particular, they analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at different maturities, the stock price and volatility as well as the stock's cumulative returns, and optimal portfolio strategies.

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