Econometrica: Nov, 2012, Volume 80, Issue 6
Capital Mobility and Asset Pricing
https://doi.org/10.3982/ECTA8822
p. 2469-2509
Darrell Duffie, Bruno Strulovici
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. The bargaining power of an investor depends on potential access to 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, and can be reduced by competition among intermediaries.
Supplemental Material
Supplement to "Capital Mobility and Asset Pricing"
This supplement uses appendix and equation numbering that continue from the main text of the paper.
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