53 Pages Posted: 14 Dec 2014 Last revised: 16 Oct 2016
Date Written: October 14, 2016
We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings. The equilibrium price vector is uniquely determined by market clearing across institutional investors and households. We relate the model to Euler equations, mean-variance portfolio choice, factor models, and cross-sectional regressions on characteristics. We propose an instrumental variables estimator for the asset demand system to address the endogeneity of institutional demand and asset prices. Using U.S. stock market data, we illustrate how our approach could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Keywords: Asset pricing model, Differentiated product demand systems, Institutional investors, Liquidity, Portfolio choice
JEL Classification: G12, G23
Suggested Citation: Suggested Citation
Koijen, Ralph S. J. and Yogo, Motohiro, An Equilibrium Model of Institutional Demand and Asset Prices (October 14, 2016). Available at SSRN: https://ssrn.com/abstract=2537559 or http://dx.doi.org/10.2139/ssrn.2537559
By Andrew Ang