A Supply and Demand Approach to Equity Pricing

67 Pages Posted: 7 Oct 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: August 2019

Abstract

This paper presents a frictionless neoclassical model of financial markets in which firm sizes, stock returns, and the pricing kernel are all endogenously determined. The model parsimoniously specifies the supply and demand of financial capital allocated to each firm and provides general equilibrium sizes and returns in closed form. We show that the interaction of supply and demand can coherently explain a large number of asset pricing facts. The equilibrium security market line is flatter than the CAPM predicts and can be nonlinear or downward-sloping. The model also generates the size, profitability, investment growth, value, asymmetric volatility, betting-against-beta, and betting-against-correlation anomalies, while also fitting the cross-section of firm characteristics.

Keywords: Anomalies, Asset Pricing, capital allocation, factor-based investing, General Equilibrium, 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 (August 2019). CEPR Discussion Paper No. DP13974, Available at SSRN: https://ssrn.com/abstract=3464501

Sebastien Betermier (Contact Author)

McGill University - Desautels Faculty of Management ( email )

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

Laurent E. Calvet

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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