Capital Market Equilibrium with Competition Among Institutional Investors
29 Pages Posted: 7 Mar 2012 Last revised: 28 Jul 2023
Date Written: May 1, 2013
We develop a dynamic general equilibrium model to study how competition among institutional investors affects the stock market characteristics - level, expected return, and volatility. We consider an economy in which multiple fund managers strategically interact with each other, as each manager tries to increase her performance relative to the others. We fully characterize an equilibrium in this economy, and find that a more intense competition is associated with a higher level of the market, lower expected market return, while market volatility is not affected by competition. These findings are broadly consistent with the data.
Keywords: G12, G29
JEL Classification: asset pricing, competition, money management, relative performance
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