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Financial Expertise and Asset Prices

Lei Zhang, Hanno Lustig and Andrea Eisfeldt
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Lei Zhang: UCLA
Hanno Lustig: Anderson School of Business

No 1347, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the effects of the joint distribution of the stock financial expertise and financial wealth on asset prices. By modeling financial expertise as a stock, we are able to incorporate economic ideas from capital theory as well as industrial organization into a model with slow moving capital. We aim to explain the persistence of risky arbitrage opportunities by modeling the entry and investment decisions of ``financial experts''. Our theory also naturally yields size and performance distributions for experts, and we will use empirical distributions from the hedge fund industry to help to calibrate our model.

Date: 2013
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