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  5. Recent Advances in Asset Pricing: Theory Meets Data
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Recent Advances in Asset Pricing: Theory Meets Data

Paper Session

Monday, Jan. 5, 2026 10:15 AM - 12:15 PM (EST)

Loews Philadelphia Hotel, Commonwealth Hall C
Hosted By: American Finance Association
  • Winston Wei Dou, University of Pennsylvania

Benign Granularity in Asset Market

Sergei Glebkin
,
INSEAD
Semyon Malamud
,
Swiss Federal Institute of Technology Lausanne
Alberto Teguia
,
University of British Columbia

Abstract

We develop a tractable model to study how asset concentration among a few large investors impacts asset prices and liquidity. Consistent with existing empirical evidence: (i) greater concentration is associated with higher volatility and returns, and (ii) large investors' turnover share is smaller than their proportion of total wealth. Surprisingly, higher concentration enhances liquidity, aligning with our new empirical findings. We show that increased concentration can benefit all investors in sufficiently non-competitive markets. We link the wedge between competitive and non-competitive outcomes to the Herfindahl-Hirschman Index measuring wealth concentration. The wedge can remain positive even in large markets.

Dogs and Cats Living Together: A Defense of Cash-Flow Predictability

Seth Pruitt
,
Arizona State University

Abstract

"The dividend-price present-value identity includes buybacks and issuance, from an
aggregate perspective. Aggregate dividend-price ratios forecast buybacks and issuance,
as well as returns, in the data. An alternative aggregate ratio, combining dividends and
buybacks, also forecasts cash flows and returns. The long-run variance decomposition of
either value ratio says that both cash-flow and discount-rate expectations significantly
drive stock prices."

Dissecting the AggregateMarket Elasticity

Victor Duarte
,
University of Illinois
Mahyar Kargar
,
University of Illinois
Jiacui Li
,
University of Utah
Dejanir H. Silva
,
Purdue University

Abstract

We examine the price elasticity of demand for the aggregate stock market in a general equilibrium framework that incorporates rich investor heterogeneity, passive demand, and financial constraints. Using global perturbation techniques, we analytically characterize market elasticity and find that it critically depends on investors’ cross-price elasticity—that is, the sensitivity of demand for risky assets to changes in the interest rate. When cross-elasticity is nonzero, the market remains infinitely elastic if passive investors hold the efficient share of risky assets, regardless of how price-inelastic individual investors are. In contrast, portfolio inflows have a positive price impact when risk is misallocated in the economy.

An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty

Hengjie Ai
,
University of Wisconsin-Madison
Ravi Bansal
,
Duke University
Hongye Guo
,
University of Hong Kong
Amir Yaron
,
University of Pennsylvania

Abstract

This paper develops a theory of the elasticity of preference for early resolution of uncertainty (PER) that parallels the Arrow-Pratt measure of risk aversion in expected utility theory. We demonstrate that the local welfare gain of early resolution of uncertainty is equal to the product of the elasticity of PER and the conditional variance of continuation utility. We illustrate how asset market data can be used to estimate the elasticity of PER and how this measure can be used to compute the welfare gain for various experiments of early resolution of uncertainty.

Discussant(s)
Laura Veldkamp
,
Columbia University
Ivan Shaliastovich
,
University of Wisconsin-Madison
Yinan Su
,
Johns Hopkins University
Jarda Borovicka
,
New York University
JEL Classifications
  • G1 - General Financial Markets