Emilio Espino

The dynamics of efficient asset trading with heterogeneous beliefs

This paper analyzes the dynamic properties of portfolios that sustain dynamically complete markets equilibrium when agents have heterogeneous priors. We argue that the conventional wisdom that belief heterogeneity generates continuous trade and significant fluctuations in individual portfolios may be correct but it needs some qualifications. We consider an infinite horizon stochastic endowment economy populated by many Bayesian agents with heterogeneous priors over the stochastic process of the states of nature. Our approach hinges on studying the portfolios that decentralize Pareto optimal allocations. Since these allocations are typically history dependent, we propose a methodology to provide a complete recursive characterization when agents believe that the process of states of nature is i.i.d. but disagree about the probability of the states. We show that even though heterogeneous priors within that class can indeed generate genuine changes in the portfolios of any dynamically complete markets equilibrium, these changes vanish with probability one if the true process consists of i.i.d. draws from a common distribution and the support of some agents prior belief contains the true distribution. Finally, we provide examples in which asset trading does not vanish because either (i) no agent learns the true conditional probability of the states or (ii) some agent does not know the true process generating the data is i.i.d.

The cyclical behavior of equity turnover

We measure the extent to which the cyclical behavior of the turnover of equity shares generated by individual investors on the New York Stock Exchange can be accounted for by a single source of trade embedded in a neoclassical growth economy with dynamically complete markets. The source of trade is heterogene- ity in agents’ financial wealth. In the post-war United States, turnover has been more than seven times as volatile as output and has exhibited asynchronous cycli- cal characteristics: lagged turnover has co-varied positively with output and led turnover negatively. The baseline model, calibrated to match the mean behavior of asset returns and the distribution of wealth across households, accounts for 29% of the level of turnover observed in the data and 22% of the volatility. The asynchronous relationship observed between turnover and output is puzzling. Keywords. Asset trade, dynamically complete markets, time- and wealth-varying risk aversion, production economies. JEL classification. E32, G12.

Equilibrium portfolios in the neoclassical growth model

This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dinamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal strategy in stationary endowment economies with dinamically complete markets. Whenever an environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independent.

Designing UISAs for Developing Countries

The benefits of implementing Unemployment Insurance Savings Accounts (UISAs) are studied in the presence of the multiple sources of information frictions often existing in developing countries. A benchmark incomplete markets economy is calibrated to Mexico in the early 2000s. The unconstrained optimal allocation would imply very large welfare gains relative to the benchmark economy (similar to an increase in consumption of 23% in every period). More importantly, in presence of multiple sources of information frictions, about half of those potential gains can be accrued through the implementation of UISAs with replacement rates between 40-50%, contribution rates between 10-15%, an initial liquidity transfer of about 20 quarters of average income, and higher payroll taxes to finance those initial stocks.

Stylized Facts on the Organization of Small Business Partnerships

The authors study the internal organization of small business partnerships and focus on the number of owners and ownership structure and the dynamics of these variables. They find that partnerships tend to have a small number of owners with equal distribution of ownership shares. Moreover, while partnerships with equally distributed shares tend to keep this distribution constant, those with unequally distributed shares tend to move toward more equal distribution over time. The authors highlight that these facts are in line with the theory of private information in small business partnerships proposed by Espino, Kozlowski, and Sanchez (2014).