Working Paper: NBER ID: w15295
Authors: Yannick Malevergne; Pedro Santaclara; Didier Sornette
Abstract: The heavy-tailed distribution of firm sizes first discovered by Zipf (1949) is one of the best established empirical facts in economics. We show that it has strong implications for asset pricing. Due to the concentration of the market portfolio when the distribution of the capitalization of firms is sufficiently heavy-tailed, an additional risk factor generically appears even for very large economies. Our two-factor model is as successful empirically as the three-factor Fama-French model.
Keywords: Zipf's law; Asset pricing; Market portfolio; Risk factors
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heavy-tailed distribution of firm sizes (D39) | poorly diversified market portfolio (G19) |
| poorly diversified market portfolio (G19) | emergence of Zipf factor (R12) |
| Zipf factor (D33) | asset pricing (G19) |
| heavy-tailed distribution of firm sizes (D39) | asset pricing (G19) |
| two-factor model (G41) | pricing errors and explanatory power (D40) |