We examine the behavior of forward and spot exchange rates from the perspective of the representative agent theory of asset pricing. We verify that with moderate risk aversion and time-additive preferences the theory accounts for very little (by our calculations, less than 5 percent) of the...

An endowment economy with heterogeneous agents and incomplete asset markets is specified, parameterized and solved using a numerical solution algorithm. The model features two types of infinitely lived agents who are endowed with different sources for non-tradable income. Despite not being able...