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An equilibrium model of institutional demand and asset prices

Subject

Finance

Publishing details

Working Paper

Authors / Editors

Koijen R;Yogo M

Publication Year

2016

Abstract

We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings. The equilibrium price vector is uniquely determined by market clearing for each asset. We relate our model to traditional frameworks including Euler equations, mean-variance portfolio choice, factor models, and cross-sectional regressions on characteristics. We propose two identification strategies for the asset demand system, based on a coefficient restriction or instrumental variables, which produce similar estimates that are different from the least squares estimates. We apply our model to understand the role of institutions in stock market movements, liquidity, volatility, and predictability.

Keywords

Asset pricing model; Differentiated product demand systems; Institutional investors; Liquidity; Portfolio choice

Series

Working Paper

Available on ECCH

No

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