Investment CAPM and returns anomalies

We develop a parsimonious general equilibrium production model in which heterogeneity in a small set of firm characteristics coherently explains a wide range of asset pricing anomalies and their linkages. The supply and demand of capital of each firm and equilibrium allocations and prices are available in closed form. Even in the absence of frictions, the model produces a security market line that is less steep than the CAPM predicts and can be nonlinear or downward-sloping. The model also generates the betting-against-beta, betting-against-correlation, size, profitability, investment, and value anomalies, while also fitting the cross-section of firm characteristics.

That is from a recent paper by Sebastian Betermier, Laurent E. Calvet, and Evan Jo, “A supply and demand approach to equity pricing.”  As with my other posts on investment CAPM, I am not saying this new approach is either correct or useful, as I genuinely do not know.  It’s just that I don’t see too many new ideas in economic theory these days, so when I do I am happy to give them attention.


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