SFB 303 Discussion Paper No. B-173
Author:
Klein, Martin
Title: Capital Asset Price Dynamics: Heterogeneity and
Hysteresis
Abstract: This paper discusses the price determination in asset
markets with heterogeneous investors that face costs of
portfolio adjustment. A price function mapping stochastic
dividends into prices is developed. Asset prices exhibit
"hysteresis" in the sense that large dividend changes cause
a level shift in the relationship between asset prices and
dividends. For subsequent small dividend changes the new
level persists. It is reversed only when another large shock
in the opposite direction occurs. Another implication of
the model is that although all investors are risk-neutral,
the market as a whole reacts in a way "as if" there was risk
aversion. The higher the variance of the stochastic process
driving the evolution of the dividends, the higher is the
average expected return in the market.
Keywords: Hysteresis, Capital asset pricing
JEL-Classification-Number: 213, 313
Creation-Date: December 1990
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