The Representative Agent of an Economy with External Habit Formation and Heterogeneous Risk Aversion

Costas Xiouros; Fernando Zapatero

doi:10.1093/rfs/hhq029

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The Representative Agent of an Economy with External Habit Formation and Heterogeneous Risk Aversion

Costas Xiouros¹; Fernando Zapatero^2,3

¹ BI Norwegian Business School · ² University of Southern California · ³ California Southern University

Review of Financial Studies 2010

In this article, we derive an analytic expression for the representative agent of a large class of economies populated by agents with “catching up with the Joneses” preferences, but who exhibit heterogeneous risk aversion. As Chan and Kogan (2002) show numerically, the representative agent has stochastic risk that moves countercyclically to the state variable. However, we show that heterogeneity of risk aversion alone is insuﬀicient for explaining empirical regularities—namely the variability of the Sharpe ratio—that Campbell and Cochrane (1999) obtain in a model of a representative agent with stochastic risk aversion.

DOI: 10.1093/rfs/hhq029
Volume: 23 (8)
Pages: 3017-3047
Language: en
Export: BibTeX
Sources: openalex crossref