Capital Mobility and Asset Pricing
We present a model for the equilibrium movement of capital between asset markets that are distinguished only by the levels of capital invested in each. Investment in that market with the greatest amount of capital earns the lowest risk premium. Intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return. Those fees also depend on the bargaining power of the investor, in light of potential alternative intermediaries. In equilibrium, the speeds of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets.
We are grateful for reactions at Oxford University, the Gerzensee European Summer Symposium in Financial Markets, the University of Toulouse, The London School of Economics, London Business School, Yale University, NBER Asset Pricing Conference, and especially for comments from Bruno Biais, Eddie Dekel, Julien Hugonnier, Jean-Charles Rochet, Larry Samuelson, Avanidhar (Subra) Subrahmanyam, Jean Tirole, Dimitri Vayanos, and Glen Weyl. The advice of the editor and several anonymous referees was very useful. We are thankful for the research assistance of Sergey Lobanov and Felipe Veras. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.