A Demand System Approach to Asset Pricing

Ralph S.J. Koijen, Motohiro Yogo

NBER Working Paper No. 21749
Issued in November 2015, Revised in July 2019
NBER Program(s):Asset Pricing, Industrial Organization

We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets’ own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using US stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21749

Published: Ralph S. J. Koijen & Motohiro Yogo, 2019. "A Demand System Approach to Asset Pricing," Journal of Political Economy, vol 127(4), pages 1475-1515.