 Capital immobility and the reach for yieldAlan Moreira Journal of Economic Theory, 2019, vol. 183, issue C, 907-951 Abstract: I build a model in which financial intermediation slows down capital flows. Investors optimally learn from intermediary performance to allocate capital toward profitable intermediaries. Intermediaries reach for yield—i.e., they invest in high-tail-risk assets—in an attempt to drive flows and reduce liquidation risk. Intermediaries with strong opportunities face a trade-off between choosing a portfolio that maximizes profitability, and choosing one that maximizes the speed at which capital flows. In equilibrium, reaching for yield is stronger among intermediaries with weak opportunities, resulting in a reduction in the informativeness of performance; investors thus take longer to learn, and capital flows become less responsive to performance. Capital becomes slow-moving because the reach for yield dampens learning. The model predicts capital immobility to be stronger when tail risk is high; when tail risk is under priced; and in asset classes with large cross-sectional variation in tail-risk exposures. Keywords: Slow-moving capital; Limit-to-arbitrage; Financial intermediation; Reputation concerns (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:907-951 DOI: 10.1016/j.jet.2019.07.010 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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