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A demand system approach to asset pricing

Author(s): Koijen, RSJ; Yogo, Motohiro

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Abstract: © 2019 by The University of Chicago. All rights reserved. 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.
Publication Date: 19-Jun-2019
Citation: Koijen, RSJ, Yogo, M. (2019). A demand system approach to asset pricing. Journal of Political Economy, 10.1086/701683
DOI: doi:10.1086/701683
ISSN: 0022-3808
EISSN: 1537-534X
Pages: 1 - 41
Type of Material: Journal Article
Journal/Proceeding Title: Journal of Political Economy
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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