Working Paper: NBER ID: w21749
Authors: Ralph S.J. Koijen; Motohiro Yogo
Abstract: We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets’ own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using US stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Keywords: Asset Pricing; Institutional Demand; Market Volatility; Predictability
JEL Codes: G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional demand (R22) | asset pricing (G19) |
| characteristics-based demand system (C69) | unique equilibrium price vector (D41) |
| demand being downward sloping (D12) | unique equilibrium price vector (D41) |
| price impact of demand shocks has decreased (E39) | cross-sectional distribution of price impacts has compressed (D39) |
| demand-side effects (H31) | cross-sectional variance of stock returns (G17) |
| latent demand (R22) | cross-sectional variance of stock returns (G17) |
| larger institutions (I23) | stock market volatility (G17) |
| mean reversion in latent demand (C22) | cross-sectional variation in stock returns (G12) |