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A Demand System Approach to Asset Pricing

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  • Ralph S. J. Koijen
  • Motohiro Yogo

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.

Suggested Citation

  • Ralph S. J. Koijen & Motohiro Yogo, 2015. "A Demand System Approach to Asset Pricing," Staff Report 510, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:510
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    More about this item

    Keywords

    Differentiated product demand systems; asset pricing models; Institutional investors; Portfolio choice; Liquidity;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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