Slow-Moving Capital and Stock Returns
48 Pages Posted: 1 May 2014 Last revised: 7 Jun 2019
Date Written: April 2019
Abstract
This paper studies the effects that delays in capital allocations in the stock market and high short-term trading incentives have on returns of this market. We report that capital inertia makes the Sharpe ratio and the volatility of the stock returns many times higher than in an economy with no capital delays. Furthermore, in agreement with empirical literature, the stock price displays short-term overreaction and high volatility of the conditional Sharpe ratio.
Keywords: General Equilibrium; Asset Pricing; Risk Premium Puzzle; Slow Capital Movement
JEL Classification: G11, G12
Suggested Citation: Suggested Citation