Heterogeniety and limited stock market participation

Abstract

We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. Two ordinally equivalent versions are considered, each associated with a di erent set of risk premiums and interest rate. The rst version has consumption history dependent marginal utility and is homogeneous of degree one in consumption, the second version is homothetic. When solving the resulting sup-convolution problem, this gives non-trivial results. A heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio.