Working Paper: NBER ID: w17296
Authors: Darrell Duffie; Bruno Strulovici
Abstract: We present a model for the equilibrium movement of capital between asset markets that are distinguished only by the levels of capital invested in each. Investment in that market with the greatest amount of capital earns the lowest risk premium. Intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return. Those fees also depend on the bargaining power of the investor, in light of potential alternative intermediaries. In equilibrium, the speeds of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets.
Keywords: capital mobility; asset pricing; intermediaries; risk premium
JEL Codes: D4; D53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital levels in each market (G19) | capital mobility (F20) |
| capital mobility (F20) | speed of adjustment in mean returns (C22) |
| capital mobility (F20) | speed of adjustment in capital flow (F32) |
| greater capital imbalance (F32) | speed of adjustment in mean returns (C22) |
| greater capital imbalance (F32) | speed of adjustment in capital flow (F32) |
| intermediaries facilitate capital movement (F21) | capital mobility (F20) |
| competition among intermediaries (L13) | capital mobility (F20) |
| bargaining power of intermediaries (L14) | capital mobility (F20) |