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American Economic Review: Vol. 102 No. 3 (May 2012)

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Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default

Article Citation

Tsyrennikov, Viktor. 2012. "Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default." American Economic Review, 102(3): 156-60.

DOI: 10.1257/aer.102.3.156

Abstract

We study asset markets and wealth dynamics in the economy with heterogeneous beliefs and risk of default. Agents can trade a full set of Arrow securities but are allowed to default on their delivery promises. Financial markets rationally subject agents to the endogenous "no-default" borrowing limits. Because of the rich menu of financial assets traded in the market speculation opportunities are plentiful. Financial wealth is volatile and the endogenous borrowing limits are always active. Variance of the asset returns is amplified. The asset trading volume is substantial and volatile.

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Authors

Tsyrennikov, Viktor (Cornell U)

JEL Classifications

D31: Personal Income, Wealth, and Their Distributions
D83: Search; Learning; Information and Knowledge; Communication; Belief
G12: Asset Pricing; Trading volume; Bond Interest Rates
D14: Personal Finance


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