Two-person dynamic equilibrium in the capital market

When several investors with different risk aversions trade competitivelyin a capital market, the allocation of wealth fluctuates randomlyamong them and acts as a state variable against which each marketparticipant will want to hedge. This hedging motive complicatesthe investors' portfolio choice and the equilibrium in the capitalmarket. This article features two investors, with the same degreeof impatience, one of them being logarithmic and the other havingan isoelastic utility function. They face one risky constant-return-to-scalestationary production opportunity and they can borrow and lendto and from each other. The behaviors of the allocation of wealthand of the aggregate capital stock are characterized, alongwith the behavior of the rate of interest, the security marketline, and the portfolio holdings.