A demand system approach to asset pricing

Ralph S.J. Koijen, Motohiro Yogo

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1475-1515
Number of pages41
JournalJournal of Political Economy
Volume127
Issue number4
DOIs
StatePublished - Aug 1 2019

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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