Asset pricing with heterogeneous preferences,beliefs, and portfolio constraints |
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| Institution: | 1. PUC-Rio, Brazil;2. Federal Reserve Bank of Richmond, United States;1. Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. West, Montréal, QC Canada H3G 1M8;2. CIREQ, Montréal, QC, Canada;3. Department of Economics, National University of Mongolia, Baga Toiruu 4, Ulaanbaatar, Mongolia;1. Division of Monetary Affairs Board of Governors of the Federal Reserve System, United States;2. The Clearing House, 1114 Avenue of the Americas, New York, NY 10036, United States;3. La Caixa Research Department, Spain;1. International Monetary Fund and Joint Vienna Institute, Austria;2. Rutgers University and NBER, United States;1. CER-ETH - Center of Economic Research at ETH Zurich, Zürichbergstrasse 18, 8092 Zurich, Switzerland;2. CEPR, United Kingdom;1. Canada Research Chair in Risk Management, HEC Montréal, CIRRELT, and CIRPÉE, 3000 Cote Ste Catherine, Montreal, QC H3T 2A7, Canada;2. Department of Finance and Insurance, Lingnan University, 8 Castle Peak Road, Tuen Mun, Hong Kong |
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| Abstract: | Portfolio constraints are widespread and have significant effects on asset prices. This paper studies the effects of constraints in a dynamic economy populated by investors with different risk aversions and beliefs about the rate of economic growth. The paper provides a comparison of various constraints and conditions under which these constraints help match certain empirical facts about asset prices. Under these conditions, borrowing and short-sale constraints decrease stock return volatilities, whereas limited stock market participation constraints amplify them. Moreover, borrowing constraints generate spikes in interest rates and volatilities and have stronger effects on asset prices than short-sale constraints. |
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| Keywords: | Heterogeneous investors Borrowing constraints Short-sale constraints Limited participation Volatility |
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