Professor Zipf Goes to Wall Street
University of Saint Etienne - Graduate School of Economics and Business Administration (ISEAG); EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control
New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)
NBER Working Paper No. w15295
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: 34
Date posted: August 31, 2009
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