Asset Demands of Heterogeneous Consumers with Uninsurable Idiosyncratic Risk Peter Hartley Rice University and The Australian National University and Chris Jones The Australian National University Abstract We examine asset market equilibrium in an intertemporal economic model with indi- vidual and aggregate uncertainty and where the asset market is incomplete. Modigliani-Miller leverage irrelevance holds, even when consumers face borrowing constraints, because individual firms cannot alter the equilibrium portfolio of securi- ties available to consumers. We show that households demand less risky portfolios as their financial wealth increases because a given asymmetry in asset holdings imparts more variability to income when wealth is high. Finally, we confirm previous results that endogenous rates of time preference, uninsurable idiosyncratic risk and house- hold borrowing constraints produce a very low risk-free real interest rate. Version: July 10, 2008