Collaborative Research: Heterogeneity, Risk Premia, and Macroeconomic Fluctuations

Princeton University, Princeton NJ

Investigators

Abstract

Abstract Financial assets differ in their exposure to aggregate risk. Investing in the stock market, for instance, is substantially riskier than investing in short-term government bonds. There is substantial heterogeneity across households, financial institutions, and countries in their portfolios of these assets, suggesting that investors differ in their capacity or willingness to bear risk. This project studies how this heterogeneity matters for the transmission of business cycle shocks and macroeconomic policy. The project will improve our understanding on macro-financial linkages and will have potential implications for monetary policy and financial markets. The project bridges recent advances in heterogeneous agent New Keynesian models and asset pricing with segmented markets, which have been largely disconnected. The proposed research accounts for aggregate risk, heterogeneity in portfolio choice, and nominal rigidities within a unified framework. The project aims to explore research questions on the transmission of macroeconomic shocks by taking into account the relationship between movements in risk premia and the real economy. The project will further consider the role of the dollar in the international financial system, and the role of asset prices in the design of optimal stabilization policy. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.