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Complex Asset Markets

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  • Andrea L. Eisfeldt
  • Hanno Lustig
  • Lei Zhang

Abstract

We develop a dynamic equilibrium model of complex asset markets with endogenous entry and exit in which the investment technology of investors with more expertise is subject to less asset-specific risk. The joint equilibrium distribution of financial expertise and wealth then determines risk bearing capacity. Higher expert demand lowers equilibrium required returns, reducing overall participation. In equilibrium, investor participation in more complex asset markets with more asset-specific risk is lower, despite higher market- level Sharpe ratios, provided that asset complexity and expertise are complementary. We analyze how asset complexity affects the stationary wealth distribution of complex asset investors. Because of selection, increased asset complexity reduces wealth concentration, even though the wealth distribution for more expert investors has fatter tails.

Suggested Citation

  • Andrea L. Eisfeldt & Hanno Lustig & Lei Zhang, 2017. "Complex Asset Markets," NBER Working Papers 23476, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23476
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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