Darrell Duffie, Dean Witter Distinguished Professor of Finance, The Graduate School of Business, Stanford University.Dark Markets AbstractInvestors do not respond instantly to variation in risk-adjusted expected returns across financial markets. As a result, asset returns may be more sensitive in the short run to supply shocks than standard asset-pricing theories would predict. After initial reactions to supply shocks or changes in information, expected returns may revert together across markets more slowly than standard theories would suggest. These lags vary with the opaqueness of a market, and may reflect the time that it takes to become aware of an investment opportunity, to find a suitable counterparty, and to negotiate and execute a trade. This lecture will review evidence of "Dark Markets" from a growing body of empirical research, citing examples from insurance markets, bond markets, stock markets, and money markets, and will suggest some conceptual approaches based on search theory. THURSDAY, September 18, 2008 |