Characteristics-Driven Returns in Equilibrium

40 Pages Posted: 12 Oct 2021 Last revised: 22 Dec 2022

Date Written: December 21, 2022


We propose an equilibrium construction process of asset prices that generates returns which depend on firm characteristics, possibly in a linear fashion. One key requirement is that agents must have demands that rely separately on firm characteristics and on the log-price of assets. Market clearing via exogenous (non-factor driven) supply, combined with linear demands in characteristics, yields the sought form. The coefficients in the resulting linear expressions are scaled net aggregate demands for characteristics, as well as their variations, and both can be jointly estimated via panel regressions. Empirically, our results reveal that latent demands, which are orthogonal to characteristics, often explain a large proportion of the dispersion in average returns. Characteristics only become relevant when they survive LASSO selections that discard a large majority of their peers.

Keywords: Characteristics-based investing, Asset pricing, Cross-section of returns

JEL Classification: G12, C62, D81

Suggested Citation

Coqueret, Guillaume, Characteristics-Driven Returns in Equilibrium (December 21, 2022). Available at SSRN: or

Guillaume Coqueret (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132

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