• Live Fast, Die Young: Equilibrium and Survival in Large Economies, with Elyès Jouini, Economic Theory, 2021, 71(3), 961-996.

Abstract: We model a continuous-time economy with a continuum of investors who differ both in belief and time preference rate and analyze the impact of these heterogeneities on the behavior of financial markets. In particular, we allow the two types of heterogeneity to be correlated: a negative correlation means that the most optimistic agents are also the most patient ones. We fully characterize the risk-free rate which is procyclical and the market price of risk which is countercyclical. When the two types of heterogeneity are negatively correlated, the former is higher and the latter lower compared to the standard case. A negative correlation also leads to a higher market volatility. Moreover, we find that the trading volume increases with the variance of the belief heterogeneity distribution. Finally, the surviving agent of this economy is not necessarily the one who maximizes her utility over her lifetime: a shorter life might be more rewarding than a longer one. 

• Heterogeneous Beliefs, Bonds, and Interest Rates, with Elyès Jouini.

Abstract: We develop a general equilibrium model of interest rates in a continuous-time production economy populated by shareholders with heterogeneous beliefs. It allows us to study the impact of belief heterogeneity on the risk-free rate and bond characteristics. The model leads to a CIR-model-like dynamic of the risk-free rate with time-dependent parameters that depend endogenously on belief heterogeneity. Flight-to-safety induces an increase in the bond price when the share of optimists declines. In addition, the impact of belief dispersion increases with the bond maturity and higher dispersion results in higher bond prices in economies where pessimistic shareholders hold most of the wealth. In optimistic economies, the relation reverses except for the case of highly dispersed beliefs and (very) long-term bonds. Lastly, heterogeneous beliefs increase bond yield volatility, helping to solve the excess bond yield volatility puzzle.

Presented at*: Hong Kong Joint Finance Research Workshop (2022), City University of Hong Kong (2023), EUROFIDAI-ESSEC Paris December Finance Meeting (2023).

• Two Skewed Risks, with Paul Karehnke. 

Abstract: We analyze the joint effects of skewness and correlation in a two-risky-asset framework. Returns follow the split bivariate normal distribution, which combines bivariate normal distributions with different standard deviations and provides a good empirical fit. We show that equilibrium risk premia deviate from the CAPM if assets differ in skewness. Moreover, if the more positively skewed asset is more volatile, it underperforms and its beta, maximum return, idiosyncratic and systematic skewnesses are all higher—consistent with empirical evidence. We also derive formulas and analyze the role of skewness for portfolio choice and recently proposed conditional risk metrics. 

Presented at*: 48th EGRIE Annual Seminar (2021), 14th Financial Risks International Forum (2021), Tilburg University (2020), Université Paris Dauphine - PSL (2018).