Research seminar by Giuliano Curatola (Swiss Finance Institute at EPFL): «Asset Prices with Heterogeneous Loss Averse Investors»

February 11 at 4.30 pm, room3211 (Shabolovka st., 26) International College of Economics and Finance held Research Seminar.

Speaker: Giuliano Curatola (Swiss Finance Institute at EPFL)
Theme: «Asset Prices with Heterogeneous Loss Averse Investors»
Venue: Shabolovka st., 26; room 3211

Abstract: This paper considers a general-equilibrium model with loss-aversion in consumption and heterogeneity: there is a continuum of agents, with s-shaped utility, who differ in the time-varying reference level of consumption. Heterogeneity in the reference level is crucial for the existence of the equilibrium, which cannot be obtained with a representative agent or a discrete number of agents. Loss-aversion in consumption induces a kink in the pricing kernel and consequently, jumps in the market price of risk, stock return, and volatility. An economy populated with only loss-averse agents produces one counterfactual property of asset prices: the return volatility and the market price of risk are higher in good times than in bad times. The coexistence of both loss-averse and risk-averse agents in the economy helps fixing this undesirable property and also explains the dynamics of trading volume and its correlation with asset prices.