Asset Price Dynamics in Partially Segmented Markets

We develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the dir...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2018-09, Vol.31 (9), p.3307-3343
Main Authors: Greenwood, Robin, Hanson, Samuel G., Liao, Gordon Y.
Format: Article
Language:English
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly affected asset class become disconnected from those in others. Over the long run, capital flows cause prices of risk to become more closely aligned. While prices in the directly affected market initially overreact, prices in related markets may underreact. We use the model to reassess event-study evidence on quantitative easing.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhy048