A Supply and Demand Approach to Equity Pricing

Laurent Calvet, Sebastien Betermier and Evan Jo

No 13974, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Asset pricing; Anomalies; Capital allocation; General equilibrium; Factor-based investing; Production economy (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-fmk and nep-ore
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Citations: View citations in EconPapers (1)

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