We develop and solve analytically a general equilibrium model where investors have heterogeneous wealth levels and exhibit uncertainty aversion. The model explains several salient patterns of household investments: (i) a sizeable fraction of households do not participate in the stock market,...

There is a simple but overlooked way of capturing the wealth effect under CARA utility via making the absolute-risk aversion parameter wealth-dependent. We implement this approach in the asymmetric information setting of Verrecchia (1982), and compare it with the alternative approach of changing...

There is a simple method to account for the wealth effect of investment decisions that works under CARA utility via making the absolute risk aversion parameter wealth-dependent. Focusing on the setting of Verrecchia (1982), we compare our approach with that of Peress (2004) who instead changes...

Building on a framework of heterogeneous uncertainty across the population, this paper provides a unified theoretical explanation for several salient features of household investment behavior: First, a fraction of households will choose not to participate in the stock market, with poorer...

In order to explain cross-country differences in the effects of capital market liberalization, this paper proposes a model of international asset markets in which investors in different countries each face constraints on portfolio choice. The model demonstrates that liberalization, i.e. the...

Models of frictionless markets in which investors hold heterogeneous beliefs are observationally equivalent to those in which investors have different degrees of ambiguity aversion in the sense of Gilboa and Schmeidler (1989): the investors who are more optimistic about a certain asset will hold...