We present a production-based model in which agents have heterogeneous risk aversion and heterogeneous discount rates. When the less risk-averse agent is more impatient, the two types of agents can coexist for a long time. The heterogeneity in risk aversion and discount rate induces the wealth...

We study the Epstein-Zin model with recursive utility. Recognizing that recursive preferences implies that the underlying model is not Markovian, we use methods not depending upon the Markov property to solve the model. We work with the returns directly, which we approximate by Taylor series...

We show that the quotient of Levy processes of jump-diffusion type has a fat-taileddistribution. An application is to price theory in economics, with the result that fat tails ariseendogenously from modeling of price change based on an excess demand analysis resulting in aquotient of arbitrarily...

We derive the equilibrium interest rate and risk premiums using recursive utility for jump-diffusions. Compared to to the continuous version, including jumps allows for a separate risk aversion related to jump size risk in addition to risk aversion related to the continuous part. The jump part...

We examine the effect of demographic shifts on asset prices in an overlapping generations model with endogenous population dynamics. We establish a robust inverse relationship between returns and the old dependency ratio. We document the absence of a simple monotonic relationship between asset...

We survey theoretical developments in the literature on the limits of arbitrage. This literature investigates how costs faced by arbitrageurs can prevent them from eliminating mispricings and providing liquidity to other investors. Research in this area is currently evolving into a broader...

In this paper, we analyze how tail risk impacts both asset prices and the optimal asset allocation. For this purpose, we consider an equilibrium model with investors exhibiting an empirically well-justifiable decreasing relative risk aversion (DRRA) and different investment horizons. In contrast...

In financial economics, numerous theoretical models explain the relationship between investment risk and return in the capital market, one of the most common being the Capital Asset Pricing Model (CAPM). After reviewing the literature in this area, this study discusses the theoretical background...