Financial Analysts Journal 01 Jan 1984 Volume 40 Issue 1
The Demand for Capital Market Returns: A New Equilibrium Theory
Investors demand more of an asset, the more desirable the asset’s characteristics. The most important characteristic is its price, or expected return. By varying price, any and all assets become desirable enough for the capital market to clear.
Asset characteristics other than price include both risk and non-risk characteristics. The Capital Asset Pricing Model and Arbitrage Pricing Theory have described the risk characteristics. The non-risk characteristics are not as well understood. They include taxation, marketability and information costs. For many assets, these non-risk characteristics affect price, or expected return, even more than the risk characteristics.
Investors regard asset characteristics as positive or negative costs, and investors evaluate expected returns net of these costs. The New Equilibrium Theory (NET) framework applies to all assets—including stocks and bonds, real estate, venture capital, durables and intangibles such as human capital—and incorporates all asset characteristics.
About the Author(s)
Roger G. Ibbotson is Professor in the Practice Emeritus of Finance at Yale School of Management and chairman of Zebra Capital Management, LLC, a global equity investment and hedge fund manager. He is founder and former chairman of Ibbotson Associates. Professor Ibbotson conducts research on a broad range of financial topics, including popularity, liquidity, investment returns, mutual funds, international markets, portfolio management, and valuation. He has written numerous books and articles, including Stocks, Bonds, Bills, and Inflation (coauthored by Rex Sinquefield), which is updated annually and serves as a standard reference for information and capital market returns. Professor Ibbotson’s other books include The Equity Risk Premium, Lifetime Financial Advice, and, most recently, Popularity: A Bridge between Classical and Behavioral Finance. He is a regular contributor to and an editorial board member of both trade and academic journals. Professor Ibbotson serves on numerous boards and frequently speaks at universities, conferences, and other forums. He received his bachelor’s degree in mathematics from Purdue University, his MBA from Indiana University, and his PhD from the University of Chicago, where he also taught for more than 10 years and served as executive director of the Center for Research in Security Prices.
Laurence B. Siegel is the Gary P. Brinson Director of Research at CFA Institute Research Foundation and an independent consultant. He has authored, edited, or co-edited six CFA Institute Research Foundation monographs and is the author of Fewer, Richer, Greener, published by Wiley in 2019. Mr. Siegel serves on the editorial boards of several prominent journals and on the board of directors of the Q Group and the American Business History Center. He has assisted a variety of nonprofit organizations in the role of investment committee chair or member. Previously, Mr. Siegel was director of research in the Investment Division of the Ford Foundation. Before that, he served as a managing director at Ibbotson Associates (now Morningstar). His website is www.larrysiegel.org. Mr. Siegel received a BA in urban geography and an MBA in finance from the University of Chicago.