76 Pages Posted: 15 Aug 2016
Date Written: August 10, 2016
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 risk bearing capacity. Higher expert demand lowers equilibrium required returns, reducing overall participation. In equilibrium, investor participation in more complex asset markets with more asset-specific risk is lower, despite higher market-level Sharpe ratios, provided that asset complexity and expertise are complementary. We analyze how asset complexity affects the stationary wealth distribution of complex asset investors. Because of selection, increased asset complexity reduces wealth concentration, even though the wealth distribution for more expert investors has fatter tails.
Keywords: heterogeneous agent models, industry equilibrium, firm size distribution, segmented markets, limits of arbitrage
Suggested Citation: Suggested Citation
Eisfeldt, Andrea L. and Lustig, Hanno N. and Zhang, Lei, Complex Asset Markets (August 10, 2016). Available at SSRN: https://ssrn.com/abstract=2821381