AQR Insight Award

An Equilibrium Model of Institutional Demand and Asset Prices


Ralph S.J. Koijen, Ph.D., New York University Stern School of Business, CEPR and NBER, and Motohiro Yogo, Ph.D., Princeton University and NBER

While demand curves are an important part of economic theory, they have not played a large role in empirical asset pricing which has focused directly on prices and returns.  Due largely to the empirical difficulty in estimating demand for financial securities, the finance literature has instead abstracted from the demands that drive prices. In this paper, the authors take up this ambitious and challenging task using a well-crafted model to tie price movements to demanded quantities (shares) in order to better understand asset market movements, volatility, and predictability. The authors develop a framework used extensively in industrial organization to model demand for U.S. stocks across different investors. They then use this model to back out expected return estimates that can help explain the role institutions play in driving asset volatility.