Popularity by Roger Ibbotson

Author:Roger Ibbotson [Ibbotson, Roger]
Language: eng
Format: epub
ISBN: 9781944960612
Publisher: CFA Institute Research Foundation
Published: 2019-01-14T05:00:00+00:00

Asset Class Characteristics

IDS included a table of the characteristics of various asset classes that should be priced in the NET framework. We provide this table here as Exhibit 4.1 . These characteristics are classified according to being related to risks, taxability, and marketability as discussed in the preceding quotations.

Conclusion

NET is a classical precursor to the popularity asset pricing model because it is based on a principle for understanding how investors’ attitudes toward the nonrisk characteristics of securities affect how securities are priced in an equilibrium model. NET can easily be extended to include behavioral preferences, as we do in this book.

Although the creators of the NET framework, Ibbotson, Diermeier, and Siegel (1984) , did not develop a formal equilibrium model, they had a number of insights related to the costs of owning securities that rational investors would consider when making investment decisions. In this chapter, we showed how such costs can be incorporated into an investor utility function and how the first-order condition for maximizing that utility function matches the authors’ notion of equating the supply of and the demand for capital market returns. In the next chapter, this first-order condition is the starting point for a formal equilibrium model in which investors’ attitudes toward all characteristics, both rational and irrational, determine asset prices.

Exhibit 4.1. Asset Class Characteristics Priced in NET

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