A Heterogeneous-Agent Model for the Latin American Financial Market

Abstract

We develop an asset pricing model with risk-aversion heterogeneity and informality, calibrated to the Latin American financial market. Using this model, we study the role of preference heterogeneity and informality in determining the equity risk premium, interest rates, stock volatility, optimal portfolio, and leverage. We demonstrate that informality, a main characteristic of Latin American countries, plays a crucial role in financial markets. Our model serves as a framework for understanding financial markets in emerging economies.