The Implications of Heterogeneity and Inequality for Asset Pricing
Does heterogeneity matter for asset pricing and in particular for risk premiums? Starting with an irrelevance result, I classify the literature into two groups of papers taking different routes to link investor heterogeneity and risk premiums. The first group contains models of investors who differ in terms of their preferences, beliefs, or access to markets. Despite their differences, these models have similar implications, and can be analyzed in a unified way. The second group of papers consists of models where investors experience uninsurable income shocks. The goal of this survey is to provide one unified framework to better understand this large literature, and especially to reconcile several of the seemingly inconsistent results found in some seminal papers.
I am indebted to Julian Batista, Paymon Khorami, Venkat Anand Systla, Geoffrey Zheng and an anonymous reviewer for their comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.