Dissertation/Thesis Abstract

Heterogeneous Agents and Finance
by Cui, Min, Ph.D., Indiana University, 2019, 155; 13900824
Abstract (Summary)

My dissertation includes three chapters focusing on the role of heterogeneous agents in finance.

The first chapter tests the Consumption CAPM under heterogeneous Epstein-Zin-Weil preferences with the data from the Panel Study of Income Dynamics database. The results show heterogeneous preferences models improve the representative agent model at three fronts: they are 1) idiosyncratic risk factors, 2) heterogeneous factor premia, and 3) idiosyncratic characteristic-dependent aggregation weights. Each front contributes positively to the overall explanatory power of consumption-based models on the time series dynamics of equity risk premium and cross-sectional variations of stock returns.

The second chapter uncovers and challenges one assumption associated with the original empirical test of the Consumption CAPM. Without assuming a complete market and a set of very strong assumptions about market frictionlessness, the original empirical test against the consumption CAPM requires the assumption that we construct an aggregated pricing kernel by summing all households’ pricing kernels with consumption weights. The consumption weight overweighs the poor and underweighs the rich, which leads to lower model implied risk premium as suggested by the Equity Premium Puzzle. I show, by relaxing this assumption, the required risk aversion can be lowered from around 80 to under 20 to match the historical data.

The third chapter investigates a source of heterogeneous preferences in financial risk-taking decisions. Together with Ziwei Zhao, we identify and quantify parents' effects on children's investment decisions through a nurturing channel.

Indexing (document details)
Advisor: Stoffman, Noah, Walker, Todd B.
Commitee: Chang, Yoosoon, Heyerdahl-Larsen, Christian
School: Indiana University
Department: Economics
School Location: United States -- Indiana
Source: DAI-A 81/2(E), Dissertation Abstracts International
Source Type: DISSERTATION
Subjects: Finance, Economics
Keywords: Asset pricing, Heterogeneous agents, Household finance
Publication Number: 13900824
ISBN: 9781085613033
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