Citation

Discussion Paper Details

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Title: A Supply and Demand Approach to Equity Pricing

Author(s): Sebastien Betermier, Laurent Calvet and Evan Jo

Publication Date: August 2019

Keyword(s): Anomalies, Asset Pricing, capital allocation, factor-based investing, General Equilibrium and production economy

Programme Area(s): Financial Economics

Abstract: This paper presents a frictionless neoclassical model of financial markets in which firm sizes, stock returns, and the pricing kernel are all endogenously determined. The model parsimoniously specifies the supply and demand of financial capital allocated to each firm and provides general equilibrium sizes and returns in closed form. We show that the interaction of supply and demand can coherently explain a large number of asset pricing facts. The equilibrium security market line is flatter than the CAPM predicts and can be nonlinear or downward-sloping. The model also generates the size, profitability, investment growth, value, asymmetric volatility, betting-against-beta, and betting-against-correlation anomalies, while also fitting the cross-section of firm characteristics.

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Bibliographic Reference

Betermier, S, Calvet, L and Jo, E. 2019. 'A Supply and Demand Approach to Equity Pricing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13974