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Equilibrium asset pricing and the cross section of expected returns

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  • Joel M. Vanden

    (Pennsylvania State University)

Abstract

In a mean-variance framework with a representative agent, any linear model for the cross section of expected returns can be supported as an equilibrium as long as the market portfolio is spanned by the factor mimicking portfolios. Any set of factors is admissible as long as the spanning condition is satisfied. Factors based on size, book-to-market, momentum, investment, profitability, behavioral biases, principal components, or any combination of these can be used as equilibrium factors. An equilibrium model with M risk factors can be reduced to a collection of M models where each model has a single risk factor, which is covariance with the market portfolio.

Suggested Citation

  • Joel M. Vanden, 2021. "Equilibrium asset pricing and the cross section of expected returns," Annals of Finance, Springer, vol. 17(2), pages 153-186, June.
    • Handle: RePEc:kap:annfin:v:17:y:2021:i:2:d:10.1007_s10436-021-00383-7
    DOI: 10.1007/s10436-021-00383-7
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    References listed on IDEAS

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    Cited by:

    1. Thomas A. Severini, 2022. "Some properties of portfolios constructed from principal components of asset returns," Annals of Finance, Springer, vol. 18(4), pages 457-483, December.

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    More about this item

    Keywords

    Asset pricing; Equilibrium; Characteristics; Beta;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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