2010 Presidential Address

Date recorded Jan 08, 2010

2010 Presidential Address: Darrell Duffie

Asset Price Dynamics with Slow-Moving Capital

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.

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