A Supply and Demand Approach to Equity Pricing

68 Pages Posted: 22 Aug 2019 Last revised: 17 Nov 2019

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2019

Abstract

We develop a parsimonious general equilibrium production model in which heterogeneity in a small set of firm characteristics coherently explains a wide range of asset pricing anomalies and their linkages. The supply and demand of capital of each firm and equilibrium allocations and prices are available in closed form. Even in the absence of frictions, the model produces a security market line that is less steep than the CAPM predicts and can be nonlinear or downward-sloping. The model also generates the betting-against-beta, betting-against-correlation, size, profitability, investment, and value anomalies, while also fitting the cross-section of firm 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 13, 2019). 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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