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Mandate models and the inelastic market hypothesis

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Listed:
  • Ruf, Johannes
  • Sun, Yueying

Abstract

The aggregate equity market displays only small price elasticity; in particular, macroeconomic allocations in and out of the equity market lead to surprisingly large impacts on stock valuations. Gabaix and Koijen study this phenomenon and provide a theoretical framework to explain the observed price inelasticity. They consider financial agents who are constrained in their investment strategies and subjected to a mandate that prescribes their investment allocations. Here we develop a rigorous framework of a mandate model for a representative agent and provide precise conditions under which the stock valuation dynamics are well defined. We also study how mandates amplify or attenuate the response of stock capitalization to changes in bond capitalization. We furthermore formulate conditions under which different funds, each one equipped with their own mandate, can be aggregated to a representative fund.

Suggested Citation

  • Ruf, Johannes & Sun, Yueying, 2026. "Mandate models and the inelastic market hypothesis," LSE Research Online Documents on Economics 140420, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:140420
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    File URL: https://researchonline.lse.ac.uk/id/eprint/140420/
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    References listed on IDEAS

    as
    1. Jean-Philippe Bouchaud, 2021. "The Inelastic Market Hypothesis: A Microstructural Interpretation," Papers 2108.00242, arXiv.org, revised Jan 2022.
    2. Jiacui Li, 2022. "What Drives the Size and Value Factors? [Connected stocks]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(4), pages 845-885.
    3. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    4. Jean-Philippe Bouchaud, 2022. "The inelastic market hypothesis: a microstructural interpretation," Quantitative Finance, Taylor & Francis Journals, vol. 22(10), pages 1785-1795, October.
    5. Xiao Cen & Winston Wei Dou & Leonid Kogan & Wei Wu, 2023. "Fund Flows and Income Risk of Fund Managers," NBER Working Papers 31986, National Bureau of Economic Research, Inc.
    6. Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi, 2012. "Hedge Fund Stock Trading in the Financial Crisis of 2007--2009," The Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 1-54.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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