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Presidential Address: Asset Price Dynamics with Slow-Moving Capital

Authors

  • DARRELL DUFFIE

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    • Darrell Duffie is at the Graduate School of Business, Stanford University. I am grateful to the American Finance Association for the opportunity to present this Presidential Address at the Annual Meeting of the American Finance Association in Atlanta in January, 2010. This written version of the address generally follows the lines of the original oral presentation, while adding details. I am pleased to acknowledge conversations or collaboration with Fernando Alvarez, Adam Ashcraft, David Bates, Stephen Buser, Lauren Cohen, Alex Edmans, Alessio Farhadi, Nicolae Gârleanu, Gaston Giroux, Jeremy Graveline, Denis Gromb, Christian Lundblad, Semyon Malamud, Gustavo Manso, Stefan Nagel, David Ng, Antti Petajisto, Lasse Pedersen, Adam Reed, Jay Ritter, Bruno Strulovici, Tong-Sheng Sun, Felipe Varas, Dimitri Vayanos, Pierre-Olivier Weill, and Hongjun Yan. I am especially grateful to Alex Edmans, Itay Goldstein, Jeremy Graveline, Wei Jiang, Jan Peter Kulak, Mark Mitchell, Yigal Newman, David Ng, Todd Pulvino, Michael Rierson, Eric Stafford, and Hongjun Yan for providing me with figures or data. I also benefited from expert research assistance by Felipe Varas, Kevin Wu, and Haoxiang Zhu.


ABSTRACT

I describe asset price dynamics caused by the slow movement of investment capital to trading opportunities. The pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries. I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward. After presenting examples of price reactions to supply shocks in normal market settings, I offer a simple illustrative model of price dynamics associated with slow-moving capital due to the presence of inattentive investors.

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