Working Paper

Demand-Based Asset Pricing in General Equilibrium

Abstract: I develop a general equilibrium macro-finance model that integrates demand-based asset pricing. Assets are held by financial intermediaries (“funds”) with investment mandates that induce downward-sloping demand curves. A representative household seeks out profitable investment opportunities by shifting its savings across funds, but it does so only gradually due to frictions in adjusting its portfolio. The aggregate demand for assets in this economy is inelastic and depends on the distribution of net worth across funds. Consequently, shocks to asset supply and unanticipated financial flows have meaningful effects on asset prices. The framework is general enough to accommodate an arbitrary set of intermediaries and assets, so it can be applied to several questions in macro-finance. Analytically, I characterize sufficient statistics to construct counterfactual asset price responses to shocks and show how these statistics relate to estimates of asset demand elasticity in the literature. Quantitatively, I demonstrate that the model can account for the “excess volatility” in asset prices.

JEL Classification: E44; E50; E58;

https://doi.org/10.21799/frbp.wp.2026.12

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2026-02-25

Number: 26-12