Instability of Financial Markets and Preference Heterogeneity

Instability of Financial Markets and Preference Heterogeneity

This paper presents a simple rational expectations model of intertemporal asset pricing relating instability of stock return characteristics to heterogeneity in investor preferences. Heterogeneity is likely to generate declining aggregate relative risk aversion. This leads to variability in expected...

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Main Authors: Günter Franke, Erik Lüders
Format: Article
Language:English
Published: Asia University 2010-01-01
Series:Advances in Decision Sciences
Online Access:http://dx.doi.org/10.1155/2010/791025
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spelling doaj-6ffd26f9c88c4f468253cb49d32363012020-11-24T21:59:00ZengAsia UniversityAdvances in Decision Sciences2090-33592090-33672010-01-01201010.1155/2010/791025791025Instability of Financial Markets and Preference HeterogeneityGünter Franke0Erik Lüders1Department of Economics, University of Konstanz, 78457 Konstanz, GermanyMcKinsey & Company, Inc., Taunustor 2, 60311 Frankfurt/Main, GermanyThis paper presents a simple rational expectations model of intertemporal asset pricing relating instability of stock return characteristics to heterogeneity in investor preferences. Heterogeneity is likely to generate declining aggregate relative risk aversion. This leads to variability in expected asset returns, volatility, and autocorrelation. The stronger this variability is, the more heterogeneous preferences are, implying more instability of financial markets. Stock market crashes may be observed if relative risk aversion differs strongly across investors.http://dx.doi.org/10.1155/2010/791025
collection DOAJ
language English
format Article
sources DOAJ
author Günter Franke
Erik Lüders
spellingShingle Günter Franke
Erik Lüders
Instability of Financial Markets and Preference Heterogeneity
Advances in Decision Sciences
author_facet Günter Franke
Erik Lüders
author_sort Günter Franke
title Instability of Financial Markets and Preference Heterogeneity
title_short Instability of Financial Markets and Preference Heterogeneity
title_full Instability of Financial Markets and Preference Heterogeneity
title_fullStr Instability of Financial Markets and Preference Heterogeneity
title_full_unstemmed Instability of Financial Markets and Preference Heterogeneity
title_sort instability of financial markets and preference heterogeneity
publisher Asia University
series Advances in Decision Sciences
issn 2090-3359
2090-3367
publishDate 2010-01-01
description This paper presents a simple rational expectations model of intertemporal asset pricing relating instability of stock return characteristics to heterogeneity in investor preferences. Heterogeneity is likely to generate declining aggregate relative risk aversion. This leads to variability in expected asset returns, volatility, and autocorrelation. The stronger this variability is, the more heterogeneous preferences are, implying more instability of financial markets. Stock market crashes may be observed if relative risk aversion differs strongly across investors.
url http://dx.doi.org/10.1155/2010/791025
work_keys_str_mv AT gunterfranke instabilityoffinancialmarketsandpreferenceheterogeneity
AT erikluders instabilityoffinancialmarketsandpreferenceheterogeneity
_version_ 1725849691049951232

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