A Demand System Approach to Asset Pricing
Journal of Political Economy, Vol. 127, No. 4, 2019
62 Pages Posted: 14 Dec 2014 Last revised: 21 Jun 2019
Date Written: June 20, 2019
We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets' own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using US stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Keywords: Asset pricing model, Demand system, Institutional investors, Liquidity, Portfolio choice
JEL Classification: G12, G23
Suggested Citation: Suggested Citation