Instability of Financial Markets and Preference Heterogeneity

Franke, Günter; Lüders, Erik

Instability of Financial Markets and Preference Heterogeneity

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Date

2010

Authors

Franke, Günter

Lüders, Erik

Publication type

Journal article

Published in

Advances in Decision Sciences ; 2010 (2010). - pp. 1-27. - ISSN 2090-3359

Abstract

This paper presents a simple rational expectations model of intertemporal asset pricing relating instability of stock return characteristics to heterogeneity in investor preferences. Heterogeneity is likely to generate declining aggregate relative risk aversion. This leads to variability in expected asset returns, volatility, and autocorrelation. The stronger this variability is, the more heterogeneous preferences are, implying more instability of financial markets. Stock market crashes may be observed if relative risk aversion differs strongly across investors.

Subject (DDC)

330 Economics

Keywords

Financial instability,aggregate relative risk aversion,equilibrium asset price processes,variability in expected stock returns and volatility,stock market crashes

Cite This

ISO 690

FRANKE, Günter, Erik LÜDERS, 2010. Instability of Financial Markets and Preference Heterogeneity. In: Advances in Decision Sciences. 2010, pp. 1-27. ISSN 2090-3359. Available under: doi: 10.1155/2010/791025

BibTex

@article{Franke2010Insta-14969,
  year={2010},
  doi={10.1155/2010/791025},
  title={Instability of Financial Markets and Preference Heterogeneity},
  volume={2010},
  issn={2090-3359},
  journal={Advances in Decision Sciences},
  pages={1--27},
  author={Franke, Günter and Lüders, Erik}
}

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