Abstract: I characterize the global solution to the portfolio problem of two heterogeneous investors with general preferences, in a two-tree, two-good environment. Investors have recursive preferences and a bias in consumption towards a preferred good. The framework highlights the role of the allocation of wealth across investors for portfolios, asset prices, and risk sharing, an aspect that had received little emphasis in such a setting. The influence of the allocation of wealth grows especially as markets become imperfectly integrated, and as investor heterogeneity rises -- be it through a larger bias in consumption, the introduction of labor income, or asymmetries in preferences -- to the point where it can match or surpass the impact of fundamentals. The framework lends itself to several applications and extensions, e.g. in international or environmental contexts.
Publication Year: 2021
Publication Date: 2021-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 4
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