A Demand System Approach to Asset Pricing

Abstract: This Staff Report was previously titled \\"An Equilibrium Model of Institutional Demand and Asset Prices.\\" {{p}} We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings data. The equilibrium price vector is uniquely determined by market clearing, which equates the supply of each asset to aggregate demand. We estimate the model on U.S. stock market data by instrumental variables, under an identifying assumption that allows for price impact. The model sheds light on the role of institutions in stock market liquidity, volatility, and predictability. We also relate the model to consumption-based asset pricing and Fama-MacBeth regressions.

Keywords: Differentiated product demand systems; asset pricing models; Institutional investors; Portfolio choice; Liquidity;

JEL Classification: G23; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2018-08-10

Number: 510

Pages: 40 pages