A Supply and Demand Approach to Capital Markets

96 Pages Posted: 22 Aug 2019 Last revised: 12 Apr 2023

See all articles by Sebastien Betermier

Sebastien Betermier

McGill University - Desautels Faculty of Management

Laurent E. Calvet

SKEMA Business School; CEPR

Evan Jo

Queen's University - Smith School of Business; McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2023

Abstract

We develop an empirically tractable supply and demand system of financial markets, which explains the cost and quantity of capital used by individual firms. Investor preferences, biases, and risk assessments drive capital supply, while a firm’s profitability and other characteristics drive demand. Firm sizes and capital costs are endogenously determined in general equilibrium. Using theoretically motivated instruments, we estimate the supply and demand schedules of over 1,200 U.S. firms. Our system produces accurate forecasts of firm sizes and capital costs. We use the estimated system to quantify the equilibrium sensitivities of size and capital cost to firm and investor characteristics.

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

JEL Classification: G11, G12

Suggested Citation

Betermier, Sebastien and Calvet, Laurent E. and Jo, Evan, A Supply and Demand Approach to Capital Markets (April 10, 2023). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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)

SKEMA Business School ( email )

5 Quai Marcel Dassault
Suresnes, 92150
France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Evan Jo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

McGill University - Desautels Faculty of Management ( email )

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

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