A seminar by Associate Professor Alexandre Jeanneret from UNSW
Title: Equity Prices in a Granular Economy
Abstract: This paper studies the asset pricing implications of a granular economy. When some firms are more like ’grains’ than atoms, shocks to such firms are not diversified away. We show in a multiple-firm model that the properties of the conditional CAPM change as the economy becomes more granular, i.e. when the largest firms represent a greater share of the economy. The slope of the Security Market Line (SML) decreases with granularity, thereby explaining the relatively ’flat’ SML observed unconditionally. A direct implication is that the performance of the betting-against-beta strategy is particularly high when granularity increases, while it is low otherwise. We provide empirical support for these predictions for the U.S. stock market over the period 1973-2020. In addition, we find that the exposure to granularity is priced negatively in stocks, consistent with the view that more granularity increases aggregate risk and reduces diversification.
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