A Supply and Demand Approach to Equity Pricing
68 Pages Posted: 22 Aug 2019 Last revised: 17 Nov 2019
Date Written: November 13, 2019
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: Suggested Citation