NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Equilibrium Model of Institutional Demand and Asset Prices

Ralph S.J. Koijen, Motohiro Yogo

NBER Working Paper No. 21749
Issued in November 2015, Revised in October 2016
NBER Program(s):Asset Pricing, Industrial Organization

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 across institutional investors and households. We relate the model to Euler equations, mean-variance portfolio choice, factor models, and cross-sectional regressions on characteristics. We propose an instrumental variables estimator for the asset demand system to address the endogeneity of institutional demand and asset prices. Using U.S. stock market data, we illustrate how our approach could be used to understand the role of institutions in asset market movements, volatility, and predictability.

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Document Object Identifier (DOI): 10.3386/w21749

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