Abstract

https://ssrn.com/abstract=2821381
 


 



Risk and Return in Segmented Markets with Expertise


Andrea L. Eisfeldt


UCLA Anderson School of Management

Hanno N. Lustig


Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Lei Zhang


The University of Hong Kong - School of Economics and Finance

August 10, 2016


Abstract:     
We develop a dynamic equilibrium model of complex asset markets with endogenous entry and exit in which the investment technology of investors with more expertise is subject to less asset-specific risk. The joint equilibrium distribution of financial expertise and wealth then determines this asset market’s risk bearing capacity. Higher expert demand lowers equilibrium required returns, reducing overall participation. In a dynamic industry equilibrium, investor participation in more complex asset markets with more asset-specific risk is lower, despite higher market-level Sharpe ratios, as long as asset complexity and expertise are complements. We analyze how asset complexity affects the stationary wealth distribution of complex asset investors. Because of selection, increased complexity reduces expertise heterogeneity and wealth concentration, even though the wealth distribution for more expert investors has fatter tails.

Number of Pages in PDF File: 60

Keywords: Segmented Markets, Slow Moving Capital, Risky Arbitrage, Hedge Funds, Industry Equilibrium, Firm Size Distribution, Financial Expertise, Intellectual Capital, Intermediary Asset Pricing


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Date posted: August 15, 2016  

Suggested Citation

Eisfeldt, Andrea L. and Lustig, Hanno N. and Zhang, Lei, Risk and Return in Segmented Markets with Expertise (August 10, 2016). Available at SSRN: https://ssrn.com/abstract=2821381

Contact Information

Andrea L. Eisfeldt (Contact Author)
UCLA Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/
Hanno N. Lustig
Stanford Graduate School of Business ( email )
Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Lei Zhang
The University of Hong Kong - School of Economics and Finance ( email )
K. K. Leung Building, Room 831
The University of Hong Kong
Hong Kong
Hong Kong
HOME PAGE: http://econleizhang.weebly.com/
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