2015/29 LEM Working Paper Series

Long-run Heterogeneity in an Exchange Economy with Fixed-Mix Traders

Giulio Bottazzi, Pietro Dindo and Daniele Giachini
Market Selection Hypothesis; Heterogeneous Beliefs; Incomplete Markets; Asset Pricing; Generalized Kelly rule.

  JEL Classifications
C60, D52, D53, G11, G12

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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