The Rational Reminder Podcast Prof. Ralph Koijen: Demand System Asset Pricing & Inelastic Markets (EP.212)
Aug 4, 2022
01:19:43
Demand System Asset Pricing Explained
- Demand system asset pricing links investor portfolio holdings with asset prices and firm fundamentals simultaneously.
- This approach helps analyze how shifts in capital allocation affect valuations and prices.
Market Inelasticity vs. Models
- Markets are less elastic than standard models assume, meaning demand shifts cause significant price changes.
- Small demand changes from investors can have large impacts on valuations if markets are inelastic.
Weak Responsiveness to Characteristics
- Investors hold concentrated, stable portfolios unexplained by traditional factor models.
- Demand responds weakly to prices and characteristics, challenging standard asset pricing theories.
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Introduction
00:00 • 4min
Is Demand More Elastic Than Standard Models?
04:13 • 4min
Lak Dimand System Assod Pricing
08:20 • 4min
What New Information Do You Get From This Approach?
12:09 • 3min
How Important Are Different Investus to Explain That Residual Variation?
14:42 • 2min
How Do You Explain Latent Demand?
17:10 • 2min
How to Estimate the Demand Modols
19:09 • 2min
How Much Did Each Group Contribute to Variation Return?
21:04 • 3min
Robin Hood
24:05 • 2min
How to Forecast the Latent Demands of a Stock
25:47 • 3min
Is the Data Available in Real Time?
28:42 • 2min
What Drives Late in Demand? And How Does It Forecast Future Fundamentals?
30:39 • 2min
Invest Yo Get a Whole Lot of New Information
32:14 • 3min
Is the Growth Inpassive Making the Market More Elastic?
34:48 • 2min
Is There a Relationship Between Elasticity and Market Efficiency?
36:24 • 2min
Index Funds Distorting Market Prices?
38:53 • 2min
The Growth of Targetate Funds Makes Markets More Elastic
41:08 • 2min
What Does Demand System Tell Us About the Effect of Socially Responsible Investing on Prices?
42:46 • 2min
What Is Your Demand for Government Bonds?
44:45 • 3min
The Lastic Market Hypothesis
47:23 • 4min
Why Are Markets So Volatile?
51:02 • 3min
How Do You Estimate the Demand Stok?
54:01 • 3min
Isolating a Shift in Demand to One Group of Investors
57:08 • 2min
What Is the Macro Elasticity?
59:27 • 2min
Is Inelasticity Exposed to Common Risk Factors?
01:01:03 • 2min
How Long Does the Price Impact of Flesh Last?
01:03:30 • 2min
How to Measure the Effect of Floes on Unexpected Returns
01:05:26 • 2min
How to Measure Flows Into the Stock Market
01:07:19 • 3min
Is Dividend Policy Still Irrelevance?
01:10:06 • 2min
Why Investsus Don't Time the Markets More Aggressively?
01:12:27 • 3min
Investing in Stock Markets
01:15:12 • 2min
How to Define Success in Your Life?
01:17:27 • 2min
If you’re ready for a serious education on market elasticity, demand system pricing, and stock market flows, you’ve come to the right place (disclaimer: don’t expect light entertainment). Today’s guest is Ralph Koijen, AQR Capital Management Professor of Finance and Fama Faculty Fellow at the University of Chicago, Booth School of Business. Tune in for a fascinating conversation about some of the most fundamental characteristics of our economy. To say we learned a lot from this conversation is an understatement, and we’re sure you’ll walk away with just as many lightbulb moments and impactful lessons as we did.
Key Points From This Episode:
- Ralph provides an in-depth explanation of demand system pricing. [0:02:48]
- An example of how valuations can be affected while the connection between fundamentals and valuations remain relatively unaffected. [0:08:18]
- How Ralph’s model for demand system asset pricing differs from other models. [0:41:26]
- The two components that investor demand is made up of. [0:14:54]
- Exploring the concept of latent demand and how to estimate it. [0:17:57]
- How the price impact from institutions and elasticity of markets has changed over time. [0:20:34]
- Understanding the surprising impact of households on stock market volatility in 2008. [0:20:34]
- How latent demand can be used to predict differences in expected returns. [0:25:46]
- Examples of factors that drive latent demand. [0:30:42]
- The most impactful group of investors (and why this is the case). [0:33:17]
- An overview of what would likely happen if the most influential investors switched to market cap indexing. [0:35:22]
- How huge firms influence the setting of prices. [0:36:25]
- Ralph shares his thoughts on the idea that index funds are distorting market prices as they continue to grow in magnitude. [0:35:22]
- What demand system pricing tells us about the effect of socially responsible investing on prices. [0:43:01]
- How US asset prices would be affected if foreign demand for US assets decreases. [0:35:22]
- Inelastic versus elastic markets. [0:47:23]
- Why prices are so much more volatile than fundamentals. [0:51:11]
- Comparing micro-elasticity and macro-elasticity. [0:52:18]
- Ways to estimate micro-elasticity and macro-elasticity, and the limitations of these approaches. [0:54:00]
- Ralph’s estimate of what the macro-elasticity is. [01:01:00]
- Risk factors that impact elasticity. [01:02:07]
- An example which shows how flows work. [01:03:32]
- Factors that impact how long the price impact of flows lasts. [01:05:24]
- Dividend irrelevance in inelastic markets. [01:10:30]
- The role of the increasing market share of cap weighted indices on market elasticity. [01:12:28]
- How investors should behave when markets are inelastic. [01:15:11]
- Ralph’s definition of success. [01:18:47]