Petajisto.

• Position: Business cycle models-evaluation - Brief Article

Representative agent models, including the Capital Asset Pricing Model, are not consistent with existing empirical evidence for steep demand curves for individual stocks. Petajisto resolves the issue by proposing that stock prices are set instead by two separate classes of investors. Individual investors price the market portfolio based on their collective risk aversion. Individual investors also delegate part of their wealth to active money managers who use that wealth...