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Professor Zipf Goes to Wall StreetYannick MalevergneUniversity of Saint Etienne - Graduate School of Economics and Business Administration (ISEAG); EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control Pedro Santa-ClaraNova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Didier SornetteSwiss Finance Institute; ETH Zurich August 20, 2009 Abstract: The heavy-tailed distribution of firm sizes first discovered by Zipf (1949) is one of the best established empirical facts in economics. We show that it has strong implications for asset pricing. Due to the concentration of the market portfolio when the distribution of the capitalization of firms is sufficiently heavy-tailed, an additional risk factor generically appears even for very large economies. Our two-factor model is as successful empirically as the three-factor Fama-French model.
Number of Pages in PDF File: 33 Keywords: Zipf, APT, firm size JEL Classification: G12 working papers seriesDate posted: August 21, 2009Suggested CitationContact Information
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