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Capital Mobility and Asset Pricing

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17296.

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Date of creation: Aug 2011
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Publication status: published as Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
Handle: RePEc:nbr:nberwo:17296

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Citations

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Cited by:
  1. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
  2. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
  3. Azusa Takeyama & Nick Constantinou & Dmitri Vinogradov, 2012. "Credit Risk Contagion and the Global Financial Crisis," IMES Discussion Paper Series 12-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Alvarez, Fernando E & Lippi, Francesco, 2011. "Persistent Liquidity Effects and Long Run Money Demand," CEPR Discussion Papers 8650, C.E.P.R. Discussion Papers.
  5. Acharya, Viral V. & Shin, Hyun Song & Yorulmazer, Tanju, 2009. "A Theory of Slow-Moving Capital and Contagion," CEPR Discussion Papers 7147, C.E.P.R. Discussion Papers.
  6. Thiago de Oliveira Souza, 2013. "Discount rates, market frictions and the mystery of the size premium," 2013 Papers pde868, Job Market Papers.
  7. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-70, April.
  8. Darrell Duffie & Bruno Strulovici, 2009. "Capital Mobility and Asset Pricing," Discussion Papers 1478, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity - Theory and Empirical Evidence," FMG Discussion Papers dp709, Financial Markets Group.
  10. Greenwood, Robin & Thesmar, David, 2011. "Stock price fragility," Journal of Financial Economics, Elsevier, vol. 102(3), pages 471-490.
  11. Atkeson, Andrew & Eisfeldt, Andrea L. & Weill, Pierre-Olivier, 2013. "The Market for OTC Derivatives," CEPR Discussion Papers 9403, C.E.P.R. Discussion Papers.
  12. Romans Pancs, 2014. "Workup," Review of Economic Design, Springer, vol. 18(1), pages 37-71, March.
  13. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Potì, Valerio & Siddique, Akhtar, 2013. "What drives currency predictability?," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 86-106.

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