Asset Price Dynamics in Partially Segmented Markets

Robin  Greenwood; Samuel G. Hanson; Gordon Y. Liao

Article | Review of Financial Studies | September 2018

Asset Price Dynamics in Partially Segmented Markets

by Robin Greenwood, Samuel G. Hanson and Gordon Y. Liao

Abstract

We develop a model in which capital moves quickly within an asset class but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists can gradually reallocate capital across markets. Upon the arrival of a large supply shock, prices of risk in the directly impacted asset class become disconnected from those in others. Over the long run, capital flows between markets and prices of risk become more closely aligned. While prices in the directly impacted market initially overreact to the supply shock, we show that prices in related asset classes underreact under plausible conditions. We use the model to assess event-study evidence on the impact of recent large-scale asset purchases by central banks.

Keywords: System Shocks; Asset Pricing;

Format: Print

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Citation:

Greenwood, Robin, Samuel G. Hanson, and Gordon Y. Liao. "Asset Price Dynamics in Partially Segmented Markets." Review of Financial Studies 31, no. 9 (September 2018): 3307–3343. (Internet Appendix Here.)

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Asset Price Dynamics in Partially Segmented Markets

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