Heterogeneous Wealth Preference and Asset Pricing

In this paper, we investigates Merton's [1] continuous-time version of asset pricing model with heterogeneous wealth preference. With our model, we found: when there exist two types investor with the different wealth preference (or spirit of capitalism) as Bakshi and Chen [2] described, the social wealth affect equity premium. When the risky asset returns positively correlates to average social wealth, the spirit of capitalism increase premium; contrarily the effect of capitalism spirit dependent the ratio of investor 11 wealth to the total wealth: under a high ratio the spirit of capitalism increases premium too. But under a lower ratio the spirit of capitalism decreases premium.