Asset Price Distributions and Efficient Markets

47 Pages Posted: 8 Jan 2019 Last revised: 26 Jan 2020

See all articles by Ricardo Fernholz

Ricardo Fernholz

Claremont McKenna College

Caleb Stroup

Davidson College

Date Written: December 24, 2018


We explore the link between stock returns and changes in market capital concentration across firms. Our theory uncovers a concentration risk factor driven by time-varying changes in the distribution of market capital. A powerful implication of our theory is the necessary existence of this concentration risk factor, which also entails a size effect. Empirically, we confirm that portfolios with exposure to concentration risk outperform the market, a premium that covaries negatively with market capital concentration, peaking during the 1970-1985 and 1995-2012 periods. Given these links, our work implies that economic models with heterogeneous firms make predictions about the size effect in stock returns.

Keywords: Asset pricing, asset returns, asset pricing factors, price distributions, efficient markets, statistical methods

JEL Classification: G10, G11, G12, C14

Suggested Citation

Fernholz, Ricardo and Stroup, Caleb, Asset Price Distributions and Efficient Markets (December 24, 2018). Available at SSRN: or

Ricardo Fernholz

Claremont McKenna College ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

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