Asset Prices with Heterogeneity in Preferences and Beliefs

This paper studies asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have power utility and differ with respect to both beliefs and their preference parameters for time discount and risk aversion. It solves in closed form for the following quantities: optimal consumption and portfolio policies of individual agents; the riskless interest rate and market price of risk; the stock price, equity risk premium, and volatility of stock returns; and, the term structure of interest rates. A revisited version of this paper was published in the Review of Financial Studies, 27.2 (2013).