Two-fund separation in dynamic general equilibrium

Arbeitspapier

This paper examines the two-fund separation paradigm in the context of an infinite-horizon general equilibrium model with dynamically complete markets and heterogeneous consumers with time- and state-separable utility functions. With the exception of the dynamic structure, we maintain the assumptions of the classical static models that exhibit two-fund separation with a riskless security. Agents have equi-cautious HARA utility functions. In addition to a security with state-independent payoffs, agents can trade a collection of assets with dividends following a time-homogeneousMarkov process. We make no further assumptions about the distribution of asset dividends, returns, or prices. If the riskless security in the economy is a consol then agents' portfolios exhibit two-fund separation. However, if agents can trade only a one-period bond, this result no longer holds. The underlying intuition is that general equilibrium restrictions lead to interest rate fluctuations that destroy the optimality of two-fund separation in economies with a one-period bond and result in different equilibrium portfolios.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Discussion Paper ; No. 1398

Klassifikation und Themen

• Klassifikation: Wirtschaft ; General Equilibrium and Disequilibrium: Financial Markets ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates
• Thema: Portfolio separation ; dynamically complete markets ; consol ; oneperiod bond ; interest rate fluctuation ; reinvestment risk

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Schmedders, Karl
• Ereignis: Veröffentlichung
• (wer): Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science
• (wo): Evanston, IL
• (wann): 2004

Weitere Informationen

• Handle: http://hdl.handle.net/10419/31251
• Letzte Aktualisierung: 15.03.0003, 11:42 MEZ