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doi:10.1016/j.ejor.2003.08.050 
Copyright © 2003 Elsevier B.V. All rights reserved.
Estimation of asset demands by heterogeneous agents*1
Accepted 25 August 2003.
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Abstract
We develop optimization models to analyze the demand for financial assets by heterogeneous agents. The models extend Frankel's [J. Portfolio Manage. 11 (4) (1985) 18] earlier approach, and relax the assumption of normality of asset returns. Instead, we assume that investors maximize an expected utility of terminal wealth based on heterogeneous attitudes toward risk. Solving a bi-level optimization program, we endogenously estimate the risk aversion parameters and derive the optimal asset holdings for each agent. The models are tested on United States market data, explaining the market structure better than previously postulated models.
Author Keywords: Risk aversion; Bi-level optimization; Heterogeneous agents; Asset demand estimation
Article Outline
- 1. Introduction
- 2. Problem definition and data
- 3. Asset demand models
- 3.1. Model 0: Friedman (1985)
- 3.2. Model I: Constrained Asset Share Estimation (CASE)
- 3.3. Model II: Constrained Heterogeneous Asset Shares Estimation (CHASE)
- 3.4. Model III: Incorporating all Available Market Information
- 4. Empirical results
- 4.1. Optimal portfolio allocation applying Model 0
- 4.2. The Constrained Asset Share Estimation––CASE
- 4.3. The Constrained Heterogeneous Asset Shares Estimation––CHASE
- 5. Conclusions
- Appendix A. A note on solution method
- References
