2010
DOI: 10.2139/ssrn.1023184
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A Multiplier Approach to Understanding the Macro Implications of Household Finance

Abstract: Our paper examines the impact of heterogeneous trading technologies for households on asset prices and the distribution of wealth. We distinguish between passive traders who hold fixed portfolios of stocks and bonds, and active traders who adjust their portfolios to changes in expected returns. To solve the model, we derive an optimal consumption sharing rule that does not depend on the trading technology, and we derive an aggregation result for state prices. This allows us to solve for equilibrium prices and … Show more

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Cited by 28 publications
(31 citation statements)
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“…The second friction, which is limited participation combined with a relatively small fraction of Mertonian traders, produces a high equity premium by concentrating the aggregate risk among Mertonian traders. This is in line with Chien et al (2011), who use a similar setup in a closed economy to explain the average level and volatility of risk premiums.…”
Section: Benchmark Resultssupporting
confidence: 86%
“…The second friction, which is limited participation combined with a relatively small fraction of Mertonian traders, produces a high equity premium by concentrating the aggregate risk among Mertonian traders. This is in line with Chien et al (2011), who use a similar setup in a closed economy to explain the average level and volatility of risk premiums.…”
Section: Benchmark Resultssupporting
confidence: 86%
“…Developing global methods would be useful as they would potentially be adequate in environments where standard perturbation methods fail and they could also provide insights on the accuracy of perturbation methods. Recent work in that direction includes Dumas and Lyasoff (2011) in finitehorizons models and Chien, Cole, and Lustig (2011) in a one-good closed economy model with multiple agents. Extending these methods to standard international macro models is a next important step.…”
Section: Shortcomings and Extensionsmentioning
confidence: 99%
“…First, we use the fixed point iteration method that has been widely used in the economic literature in various settings [e.g., Gomes and Michaelides (2008); Guvenen (2009); Chien, Cole, and Lustig (2011)]. This method at step k evaluates all coefficients of PDEs (24)-(25) using the solution from the previous step k − 1.…”
Section: Computation Of Equilibriummentioning
confidence: 99%