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Complex Asset Markets

Author

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  • Eisfeldt, Andrea L.

    (UCLA)

  • Lustig, Hanno

    (Stanford University)

  • Zhang, Lei

    (University of Hong Kong)

Abstract

We develop a dynamic equilibrium model of complex asset markets with endogenous entry and exit in which the investment technology of investors with more expertise is subject to less asset-specific risk. The joint equilibrium distribution of financial expertise and wealth then determines this asset market's risk bearing capacity. Higher expert demand lowers equilibrium required returns, reducing overall participation. In a dynamic industry equilibrium, investor participation in more complex asset markets with more asset-specific risk is lower, despite higher market-level Sharpe ratios, as long as asset complexity and expertise are complements. We analyze how asset complexity affects the stationary wealth distribution of complex asset investors. Because of selection, increased complexity reduces expertise heterogeneity and wealth concentration, even though the wealth distribution for more expert investors has fatter tails.

Suggested Citation

  • Eisfeldt, Andrea L. & Lustig, Hanno & Zhang, Lei, 2017. "Complex Asset Markets," Research Papers 3533, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3533
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/433691
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    Cited by:

    1. Leyla Jianyu Han & Kenneth Kasa, 2019. "Ambiguity and Information Processing in a Model of Intermediary Asset Pricing," Discussion Papers dp19-04, Department of Economics, Simon Fraser University.
    2. Marco Macchiavelli & Xing (Alex) Zhou, 2022. "Funding Liquidity and Market Liquidity: The Broker-Dealer Perspective," Management Science, INFORMS, vol. 68(5), pages 3379-3398, May.
    3. Peter Diep & Andrea L. Eisfeldt & Scott Richardson, 2021. "The Cross Section of MBS Returns," Journal of Finance, American Finance Association, vol. 76(5), pages 2093-2151, October.

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