provided by Research Papers in Economics
HETEROGENEITY OF INVESTORS AND
ASSET PRICING IN A RISK-VALUE
WORLD*
Günter Franke t Martin Weber $
August 9, 2001
Abstract
Portfolio choice and the implied asset pricing are usually derived
assuming maximization of expected utility. In this paper, they are de-
rived from risk-value models which generalize the Markowitz-model.
We use a behaviorally based risk measure with an endogenous or ex-
ogenous benchmark. A richer set of sharing rules is obtained than in
an expected utility world. If the risk measure is modelled by a negative
HARA-function, then sharing rules are convex or concave relative to
each other. More importantly, the pricing kernel convexity increases
with heterogeneity of investors. Therefore an increase in heterogene-
ity raises investors’ needs for trading options and makes all European
options more expensive relative to the price of the underlying asset.
JEL-Clasification: D81, Gll, G12, G13
Keywords: Decision Making Under Risk, Asset Pricing, Convexity
of Pricing Kernel, Heterogeneity of Investors
*Wo like to thank Yakov Amihttd, Now York University, Thomas Langer, Mannhcim
University, James Smith, Duke University, Mcir Statman, Santa Clara University, and
the members of the Finance seminar at Dresden University, Strathclydc University, Vi-
enna University and Tol Aviv University for many helpful suggestions which have led to
considerable improvement of the paper.
IUnivorsitat Konstanz, D-78457 Konstanz, Germany, e-mail: guontor.franko'Suni-
konstanz.do
IUnivorsitat Mannhoim, D-68131 Mannhoim, Germany, e-mail: [email protected]
mannhoim.do