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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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1478.
Length: Date of creation: 14 Sep 2009 Date of revision: Handle: RePEc:nwu:cmsems:1478
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Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kenneth A. Froot & Paul G. J. O'Connell, 1999.
"The Pricing of U.S. Catastrophe Reinsurance,"
NBER Chapters,
in: The Financing of Catastrophe Risk, pages 195-232
National Bureau of Economic Research, Inc.
[Downloadable!]
Other versions:
Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005.
"Over-the-Counter Markets,"
Econometrica,
Econometric Society, vol. 73(6), pages 1815-1847, November.
[Downloadable!] (restricted)
Other versions:
Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004.
"Over-the-Counter Markets,"
NBER Working Papers
10816, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)