Asset Pricing in the Digital Economy

Ruo-Xi Xu

Abstract

With the continuing development of the digital economy, data, platforms, and algorithms have become important and increasingly visible origins of firm value. Conventional asset pricing models in the main have reliance on financial-statement information, and they may possibly fail to fully describe the risk and return features of digital firms. On the basis of the Fama-French multifactor framework, this paper reviews the main aspects in which the digital economy changes the explanatory ability of conventional factors. It then puts forward several possible digital factors from data and algorithm aspects, including platform traffic, user scale, data assets, the proportion of quantitative trading, and the efficiency of information transmission. The bases for measuring the size, book-to-market, and profitability factors are also reconsidered, and an expanded asset pricing framework for the digital economy is developed. The analysis shows that digital factors, together with revised convention al factors, can also form a supplement to existing models when identifying the sources of value and risk exposure in digital firms. They can also provide some reference for portfolio analysis and market regulation.

Source: semanticscholar · PDF

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