Abstract

We present a model for the equilibrium movement of capital between markets. Two markets with symmetrically distributed risks are distinguished only by the levels of capital invested in the two markets. That market with the greater amount of capital earns lower conditional mean returns. 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. In equilibrium, the speed of adjustment of returns and of capital are increasing in the degree to which capital is imbalanced between the two markets. This is joint work with Bruno Strulovici of Oxford University.

WEDNESDAY, September 17, 2008
Time: 4:30 P.M.
Location: Wean Hall 7500
Refreshments at 4:00 outside Wean Hall 7500.