The Long-Run Evolution of the Financial Sector

Laura Veldkamp and Maryam Farboodi
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Maryam Farboodi: Princeton University

No 530, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: As the financial sector has swollen in size, the nature of its activities has shifted and investors have taken ever larger bets on its outcomes. The financial sector should add value by processing information, evaluating risks, disseminating that information through advising or road shows, and ultimately, using the information to allocate capital. Over time, the nature of the information processed and transmitted has changed. While financial analysis used to mean fundamental analysis of an asset's long-run value, perhaps combined with some statistical exploration of recent price trends, more recently, focus has shifted to mining order flow data to identify promising times at which to trade. We build a model that explores the reason for this analysis shift, offers testable predictions to help determine the extent of the shift, and clarifies the consequences for the real economy.

Date: 2016
New Economics Papers: this item is included in nep-his and nep-mst
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