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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2014/5:
Heterogeneity and limited stock market Participation

Knut K. Aase ()

Abstract: We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. We solve the associated sup-convolution problem, and obtain explicit closed form solutions. The heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio. This results in plausible values for the preference parameters of the two agents under various assumptions for the wealth portfolio.

Keywords: The equity premium puzzle; the risk-free rate puzzle; recursive utility; the stochastic maximum principle; heterogeneity; limited market participation; (follow links to similar papers)

JEL-Codes: D51; D53; D90; E21; G10; G12; (follow links to similar papers)

36 pages, February 28, 2014, Revised March 25, 2015

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