Capital Mobility and Asset Pricing

53 Pages Posted: 12 Aug 2011 Last revised: 6 Apr 2023

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Bruno H. Strulovici

Northwestern University

Date Written: August 2011

Abstract

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.

Suggested Citation

Duffie, James Darrell and Strulovici, Bruno H., Capital Mobility and Asset Pricing (August 2011). NBER Working Paper No. w17296, Available at SSRN: https://ssrn.com/abstract=1908584

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Bruno H. Strulovici

Northwestern University ( email )

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United States

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