Entry and slow-moving capital: using asset markets to infer the costs of risk concentration
108 Pages Posted: 10 May 2016 Last revised: 29 Oct 2021
Date Written: October 28, 2021
Risk concentration, due to slow-moving capital, is a prominent explanation for crisis dynamics of asset prices and macroeconomic quantities. Is this realistic? By considering costly entry in canonical limited participation and intermediary-based models, I illustrate how asset prices encode costs of risk concentration. These costs must be enormous to match risk premia levels and variability. This finding is robust: auxiliary features that increase risk premia levels mitigate their dynamics, through endogenous entry. Extrapolative beliefs resolves this tension: even with small participation costs, endogenous pessimism delays entry, enabling large and volatile equilibrium risk premia.
Keywords: Limited Participation, Intermediary Asset Pricing, Entry, Extrapolative Beliefs.
JEL Classification: D14, G11, G12
Suggested Citation: Suggested Citation