2015/29 | LEM Working Paper Series | ||||||||||||||||
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Long-run Heterogeneity in an Exchange Economy with Fixed-Mix Traders |
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Giulio Bottazzi, Pietro Dindo and Daniele Giachini |
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Keywords | |||||||||||||||||
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Market Selection Hypothesis; Heterogeneous Beliefs; Incomplete Markets; Asset Pricing; Generalized Kelly rule.
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JEL Classifications | |||||||||||||||||
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C60, D52, D53, G11, G12
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Abstract | |||||||||||||||||
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We consider an exchange economy where agents have heterogeneous
beliefs and assets are long-lived, and investigate the coupled
dynamics of assets prices and agents wealth. We assume that agents
hold fixed-mix portfolios and invest on each asset proportionally to
its expected dividends. Our main finding is that long-run coexistence
of agents with heterogeneous beliefs is a generic outcome of the
market selection that leads to assets’ prices en- dogenous
fluctuations. By using a direct approach that combines the inter-
temporal dynamics of wealth and prices via agents portfolios, we are
able to work with both complete and incomplete markets.
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