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...

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...

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 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...

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...

We develop a two-country international asset pricing model in which investors are heterogeneous. Exchange rate dynamics give rise to a currency risk premium, uncovered interest parity is violated. Countries whose output growth is expected to be sufficient to satisfy growth in demand have high...