Heterogeneity of Investors and Asset Pricing in a Risk-Value World

utility function is positive. Yet asset pricing turns out to be different in a
risk-value equilibrium based on HARA-risk functions as compared to an ex-
pected utility equilibrium based on HARA-utility functions. In the risk-value
world the convexity of the pricing kernel increases with the heterogeneity of
investors which is reflected in the non-linearity of their sharing rules. The
more heterogeneous investors are, the more demand for options trading ex-
ists, the more convex is the pricing kernel, the more expensive are European
options relative to the underlying asset.

These results suggest a need for further research on asset pricing and
investor heterogeneity in an expected utility framework, but also in others
like the risk-value model.

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