Capital Mobility and Asset Pricing


  • Darrell Duffie,

    1. Graduate School of Business, Stanford University, Stanford, CA 94305, U.S.A.;
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  • Bruno Strulovici

    1. Dept. of Economics, Northwestern University, Evanston, IL 60208, U.S.A.;
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    • 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, Columbia University, Northwestern University, 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. Strulovici acknowledges financial support from the National Science Foundation Grant 1151410.


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. The bargaining power of an investor depends on potential access to 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, and can be reduced by competition among intermediaries.