Working Paper: CEPR ID: DP16441
Authors: Adrian Buss; Raman Uppal; Grigory Vilkov
Abstract: To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.
Keywords: institutional asset demand; asset-demand elasticity; investors expectations; trend chasing; predictability
JEL Codes: D53; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in investor confidence (G40) | heterogeneity in asset demands (G19) |
| investors with less confidence (G40) | hold more risk-free assets (G19) |
| investors with more confidence (G40) | allocate more to riskier assets (G11) |
| confidence levels (C12) | impact demand elasticity (D12) |
| confidence heterogeneity (D80) | lower demand elasticity for less-familiar assets (G19) |
| less-confident investors (G40) | trend-chasing behavior (C92) |
| positive cash flow news (G14) | increase holdings of less-familiar assets by less-confident investors (G11) |
| more-confident investors (G40) | superior market-timing abilities (G14) |