Intertemporal Asset Pricing with Heterogeneous Consumers and Without Demand Aggregation

Consumer heterogeneity raises two problems in the derivation of the intertemporal asset-pricing model. First, it is implausible to assume that all assets' returns are multivariate normal (or exhibit separability). Second, the stochastically varying distribution of wealth among consumers is a vector of state variables which may add a large number of parameters to the two-parameter asset-pricing model. Both problems are resolved in a complete market. Optimality of the competitive equilibrium implies that prices, production, and aggregate consumption are the same as in the equilibrium of a central planner or composite consumer. In the composite consumer's observationally equivalent equilibrium no distributional assumptions are necessary about zero net supply assets. Also the wealth distribution among heterogeneous consumers becomes an irrelevant state variable.