Greenwood, Robin, Samuel Gregory Hanson, and Gordon Y. Liao. "Asset Price Dynamics in Partially Segmented Markets." Working Paper, December 2015.

Working Paper | 2015

Asset Price Dynamics in Partially Segmented Markets

by Robin Greenwood, Samuel Gregory Hanson and Gordon Y. Liao

Abstract

How do supply shocks in one financial market affect prices in other markets? We develop a model in which capital moves quickly within each asset class, but slowly between asset classes. While most investors specialize in a single market, a handful of generalists can gradually re-allocate capital across markets. When a supply shock arrives, prices of risk in the impacted market become disconnected from those in others. Over the long-run, capital flows between markets and prices of risk become more closely aligned. While prices in the impacted market initially overreact to shocks, under plausible conditions, prices in related markets underreact