Preference evolution and the dynamics of capital markets

  • This paper introduces endogenous preference evolution into a Lucas-type economy and explores its consequences for investors' trading strategy and the dynamics of asset prices. In equilibrium, investors herd and hold the same portfolio of risky assets which is biased toward stocks of sectors that produce a socially preferred good. Price-dividend ratios, expected returns and return volatility are all time varying. In this way, preference evolution helps rationalize the observed under-performance and local biases of investors' portfolios and many empirical regularities of stock returns such a time variation, the value-growth effect and stochastic volatility. Keywords: Asset pricing, general equilibrium, heterogeneous investors, interdependent preferences, portfolio choice JEL Classification: D51, D91, E20, G12

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Author:Giuliano Curatola
Parent Title (English):SAFE working paper series ; No. 128
Series (Serial Number):SAFE working paper (128)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2016
Year of first Publication:2016
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2016/04/12
Page Number:52
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht