We study the effect of introducing a non-redundant derivative on the volatilities of the stock-market return and the locally risk-free interest rate. Our analysis uses a standard, frictionless, full-information, dynamic, continuous-time, general-equilibrium, Lucas endowment economy in which...

The objective of this note is to understand the implications for consumption and portfolio choice of the separation of an investor's risk aversion and elasticity of intertemporal substitution that is made possible by recursive utility, in contrast to expected utility where the two are dictated...

Households with familiarity biases tilt their portfolios toward a few risky assets. The resulting mean-variance loss from portfolio underdiversification is equivalent to only a modest reduction of about 1 percent per year in a household's portfolio return. However, once we consider also the...

In this paper, we study asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have ldquo;catching up with the Jonesesrdquo; utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for...

In this article, we wish to understand: (i) the valuation of a non-redundant derivative in an economy where agents are heterogenous, (ii) the role of such a derivative in an investor's dynamic portfolio strategy, and (iii) the effect of introducing this derivative on the prices of more primitive...

A common criticism of behavioral economics is that it has not shown that the psychological biases of individual investors lead to aggregate long-run effects on both asset prices and macroeconomic quantities. Our objective is to address this criticism by providing a simple example of a production...

Empirical evidence shows that households' subjective beliefs deviate from rational beliefs. Combining concepts from psychology and robust control, we develop a model where the endogenous deviations of subjective beliefs from rational beliefs about firm-level expected risk premia are an...

We develop a method that allows one to compute incomplete-market equilibria routinely forMarkovian equilibria (when they exist). The main difficulty to be overcome arises from the setof state variables. There are, of course, exogenous state variables driving the economy but, in anincomplete...

We develop a method that allows one to compute incomplete-market equilibria routinely for Markovian equilibria (when they exist). The main difficulty to be overcome arises from the set of state variables. There are, of course, exogenous state variables driving the economy but, in an incomplete...