Universal bounds for asset prices in heterogeneous economies (Q1003350)

The author considers general heterogeneous economy with constant relative risk aversion utility function and establishes universal bounds for asset prices. For each agent an artificial homogeneous economy populated solely by this agent is considered, and ``homogeneous'' price of an asset in each of these economies is calculated. The main result corrects and resolves previous conjecture that the risk free rate in heterogeneous economy should lie between the maximal and the minimal ``homogeneous'' risk free rates of the artificial economies. It is proved that the answer depends on the risk aversions of the agents: the upper bound holds when all risk aversions are smaller than one, and the lower bound holds when all risk aversions are larger than one. The results are extended to arbitrary assets.