NATIONAL BUREAU OF ECONOMIC RESEARCH
NBER Working Papers and Publications
|August 2009||Professor Zipf goes to Wall Street|
with Yannick Malevergne, Pedro Santa-Clara: w15295
The heavy-tailed distribution of firm sizes first discovered by Zipf (1949) is one of the best established empirical facts in economics. We show that it has strong implications for asset pricing. Due to the concentration of the market portfolio when the distribution of the capitalization of firms is sufficiently heavy-tailed, an additional risk factor generically appears even for very large economies. Our two-factor model is as successful empirically as the three-factor Fama-French model.