Refining the general equilibrium relation that subsists between stock returns, and each of investors’ risk preferences and information sets

Abstract

Typically, models of stock prices or returns assume homogeneity of risk preference parameters. This study shows modeling of IPO prices necessarily is with reference to the distribution of risk preference parameters that already are represented in secondary equity markets. Modeling of stock returns is shown predicated only on changes to investors’ information sets, but is required to be robust to each of heterogeneity of risk preference parameters and existence, as an outcome, of representative agents. Non-bindingness of capital constraints facilitates the rational expectation that it is pricing of risk sharing benefits, not raw information, that determines stock prices.