Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189130 
Year of Publication: 
1991
Series/Report no.: 
Queen's Economics Department Working Paper No. 806
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
An endowment economy with heterogeneous agents and incomplete asset markets is specified, parameterized and solved using a numerical solution algorithm. The model features two types of infinitely lived agents who are endowed with different sources for non-tradable income. Despite not being able to insure against endowment risk, individuals are able to partially diversify away idiosyncratic risk by trading in a limited set of competitive asset markets. Numerical results indicate that the model can account for substantially more of the variability in intertemporal marginal rates of substitution documented by Hensen and Jagannathan (1990) than can models based on a representative agent. In addition, the model can generate a mean risk-free rate of interest smaller than the rate of time preference and potentially account for the so called 'risk-free rate puzzle'.
Subjects: 
incomplete markets
marginal rate of substitution
risk free rates
JEL: 
521
313
211
Document Type: 
Working Paper

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