An Equilibrium Model of Institutional Demand and Asset Prices

2017 HONORABLE MENTION

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.

READ THE PAPER


  • The information contained herein is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.