In this paper, we study asset prices in a dynamic, continuous-time, and general-equilibrium endowment economy in which agents have "catching up with the Joneses" utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the state-price density, the risk-free interest rate and market price of risk, the stock price, equity risk premium, and volatility of stock returns, the term structure of interest rates, and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general in that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.

We exploit a 2004 credit reform in Brazil that simplified the sale of repossessed cars used as collateral for auto loans. We show that the reform expanded credit to riskier, self-employed borrowers who purchased newer, more expensive cars. The legal change has led to larger loans with lower spreads and longer maturities. Although the credit reform improved riskier borrowers' access to credit, it also led to increased incidences of delinquency and default. Our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit.

In this paper, we study asset prices in a dynamic, continuous-time, and general-equilibrium endowment economy in which agents have “catching up with the Joneses” utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the state-price density, the risk-free interest rate and market price of risk, the stock price, equity risk premium, and volatility of stock returns, the term structure of interest rates, and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general in that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.

We infer conditional swap rate moments model independently from swaption cubes. Conditional volatility and skewness exhibit systematic variation across swap maturities and option expiries (conditional kurtosis less so), with conditional skewness sometimes changing sign. Conditional skewness displays some relation to the level and volatility of swap rates but is most consistently related to the conditional correlation between swap rates and swap rate variances. From realized excess returns on synthetic variance and skewness swap contracts, we infer that variance and (to a lesser extent) skewness risk premia are negative and time varying. For the most part, results hold true in both the USD and EUR markets and in both precrisis and crisis subsamples. We design and estimate a dynamic term structure model that captures much of the dynamics of conditional swap rate moments.