Dynamic Wealth Redistribution, Trade, and Asset Pricing

We relate wealth redistribution, asset pricing, and trade in financial assets by introducing heterogeneous agents into a Lucas tree-model. Heterogeneity of agents causes trade in financial assets and dynamic wealth redistribution. When consumers have time-separable, constant elasticity utilities with constant time-discount factors, the price- representative consumer has declining temporal relative risk aversion and intertemporal discount factors. Resulting asset prices quot;over-reactquot;: Adverse aggregate consumption shocks cause wealth redistribution towards more risk averse consumers, reinforcing the adverse market value effect. Interest rates, risk premia, return volatility, and trade volume exhibit time-variance