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Equilibrium asset pricing with Epstein-Zin and loss-averse investors |
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| Affiliation: | 1. Department of Industrial Engineering and Operations Research, Columbia University, S. W. Mudd Building, 500 W. 120th Street, New York, NY 10027, USA;2. Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Room 609, William M.W. Mong Engineering Building, Shatin, N.T., Hong Kong;1. Room 505, William M.W. Mong Engineering Building, Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong;2. Department of Industrial Engineering and Operations Research, Columbia University, United States;1. Boise State University, Department of Finance Boise, ID 83725, United States;2. Louisiana Tech University, Department of Economics and Finance Ruston, LA 71272, United States;1. Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, the Netherlands;2. Research School of Economics, Australian National University, Canberra, Australia |
| Abstract: | We study multi-period equilibrium asset pricing in an economy with Epstein-Zin (EZ-) agents whose preferences for consumption are represented by recursive utility and with loss averse (LA-) agents who derive additional utility of gains and losses and are averse to losses. We propose an equilibrium gain-loss ratio for stocks and show that the LA-agents are more (less) risk averse than the EZ-agents if their degree of loss aversion is higher (lower) than this ratio. When all the agents have unitary relative risk aversion degree and elasticity of intertemporal substitution, we prove the existence and uniqueness of the equilibrium and the market dominance of the EZ-agents in the long run. Finally, we extend our results to the case in which the LA-agents use probability weighting in their evaluation of gains and losses. |
| Keywords: | Equilibrium asset pricing Heterogeneous agents Recursive utility Loss aversion Gain-loss ratio Market dominance |
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