Equilibrium Driven by Discounted Dividend Volatility

We derive representations for the stock price drift and volatility in theequilibrium of agents with arbitrary, heterogeneous utility functionsand with the aggregate dividend following an arbitrary Markov diffusion.We introduce a new, intrinsic characteristic of the aggregate dividendprocess that we call the ”rate of discounting volatility” and showthat, in equilibrium, the size of market price of risk is determined bythe market price of discounted dividend volatility (DDV), discountedat that rate, and multiplied by the aggregate risk aversion. The stockprice volatility is equal to the market price of DDV plus a volatilityrisk premium.[...]