Presidential Address

 

2010 Presidential Address

Asset Price Dynamics with Slow-Moving Capital Darrell Duffie The address is available in a streaming video that may be viewed by clicking here.   Abstract I address the apparent slow movement of investment capital to trading opportunities, and the implications for asset price dynamics. The arrival of new capital can be delayed by fractions of a second in some markets, for example an electronic limit-order-book market, or months in other markets, such as that for catastrophe risk insurance. The pattern of price responses to supply or demand shocks, however, typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries.  I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward.  After presenting examples  of price reactions to supply shocks in more “normal” market settings, I offer a simple illustrative model of price dynamics associated with slow moving capital that is based on the notion that many investors do not monitor markets and adjust their positions continually.

I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. This implies that society’s capitalized cost of price discovery is at least 10% of the current market cap. Moreover, under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio.

Link to working paper at SSRN: http://ssrn.com/abstract=1105775.P

2007 Presidential Address

Issuers, Underwriter Syndicates, and Aftermarket Transparency

Richard C. Green

The address is available in the following streaming video formats:

You can download a copy of the whole 2007 Presidential Address in Adobe Acrobat pdf format

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