• 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. 

• Bonds, and Interest Rates with Good and Bad Belief Dispersion, with Elyès Jouini.

Abstract: We develop a tractable bond model in a production economy populated by shareholders with heterogeneous beliefs. The model yields a mean-reverting pro-cyclical risk-free rate and various yield curve shapes. Additionally, higher average optimism results in a lower bond price because bond demand decreases. Higher belief dispersion has similar effects in economies dominated by optimists, but the impact reverses otherwise, indicating the existence of good and bad belief dispersion. Heterogeneous beliefs also generate a stochastic bond risk premium, increasing with good belief dispersion, decreasing with bad belief dispersion, and counter-cyclical in sufficiently pessimistic economies, and increase bond yield volatility.

Presented at*: FMA Asia/Pacific Conference (2024), AFFI Conference (2024), EUROFIDAI-ESSEC Paris December Finance Meeting (2023), City University of Hong Kong (2023), Hong Kong Joint Finance Research Workshop (2022).

• 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*: EGRIE Annual Seminar (2021), Financial Risks International Forum (2021), Tilburg University (2020), Université Paris Dauphine - PSL (2018).