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

See all articles by Paymon Khorrami

Paymon Khorrami

Imperial College Business School

Date Written: October 28, 2021

Abstract

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

Khorrami, Paymon, Entry and slow-moving capital: using asset markets to infer the costs of risk concentration (October 28, 2021). Available at SSRN: https://ssrn.com/abstract=2777747 or http://dx.doi.org/10.2139/ssrn.2777747

Paymon Khorrami (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.paymonkhorrami.com

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