COLLATERAL SHORTAGES, ASSET PRICE AND INVESTMENT VOLATILITY WITH HETEROGENEOUS BELIEFS

The recent economic crisis highlights the role of financial markets in allowing economic agents, including prominent banks, to speculate on the future returns of different financial assets, such as mortgage-backed securities. This paper introduces a dynamic general equilibrium model with aggregate shocks, potentially incomplete markets and heterogeneous agents to investigate this role of financial markets. In addition to their risk aversion and endowments, agents differ in their beliefs about the future aggregate states of the economy.