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Asset Price Dynamics in Partially Segmented Markets

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  • Robin Greenwood
  • Samuel G Hanson
  • Gordon Y Liao

Abstract

We develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly affected asset class become disconnected from those in others. Over the long run, capital flows cause prices of risk to become more closely aligned. While prices in the directly affected market initially overreact, prices in related markets may underreact. We use the model to reassess event-study evidence on quantitative easing. Received June 6, 2016; editorial decision November 11, 2017 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Robin Greenwood & Samuel G Hanson & Gordon Y Liao, 2018. "Asset Price Dynamics in Partially Segmented Markets," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3307-3343.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:9:p:3307-3343.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy048
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