A Supply and Demand Approach to Equity Pricing

95 Pages Posted: 22 Aug 2019 Last revised: 24 Nov 2020

See all articles by Sebastien Betermier

Sebastien Betermier

McGill University - Desautels Faculty of Management

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Evan Jo

McGill University - Desautels Faculty of Management

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Date Written: November 24, 2020

Abstract

We develop a tractable general equilibrium framework providing a direct mapping between (i) the supply and demand for capital at the firm level and (ii) the cross-section of stock returns. Investor behavioral tilts and hedging needs drive capital supply, while firm profitability drives demand. Heterogeneity in supply and demand factors determines the sign of the risk-return relation and generates anomalies such as betting-against-beta, betting-against-correlation, size, value, investment, and profitability. We estimate the supply and demand schedules of over 4,000 U.S. firms and verify that the model accurately predicts the sign of the risk-return relation conditional on characteristics.

Keywords: Asset pricing, anomalies, capital allocation, general equilibrium, factor-based investing, production economy.

JEL Classification: G11, G12

Suggested Citation

Betermier, Sebastien and Calvet, Laurent E. and Jo, Evan, A Supply and Demand Approach to Equity Pricing (November 24, 2020). Available at SSRN: https://ssrn.com/abstract=3440147 or http://dx.doi.org/10.2139/ssrn.3440147

Sebastien Betermier

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Evan Jo

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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