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The Long-Run Evolution of the Financial Sector

Author

Listed:
  • Laura Veldkamp

    (New York University Stern School of Busi)

  • Maryam Farboodi

    (Princeton University)

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.

Suggested Citation

  • Laura Veldkamp & Maryam Farboodi, 2016. "The Long-Run Evolution of the Financial Sector," 2016 Meeting Papers 530, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:530
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    References listed on IDEAS

    as
    1. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    2. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    3. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    4. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2010. "Beauty Contests and Irrational Exuberance: A Neoclassical Approach," NBER Working Papers 15883, National Bureau of Economic Research, Inc.
    5. Kacperczyk, Marcin & Nosal, Jaromir & Stevens, Luminita, 2019. "Investor sophistication and capital income inequality," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 18-31.
    6. Vincent Glode & Richard C. Green & Richard Lowery, 2012. "Financial Expertise as an Arms Race," Journal of Finance, American Finance Association, vol. 67(5), pages 1723-1759, October.
    7. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, March.
    8. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    9. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
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    Cited by:

    1. Matthijs Breugem & Adrian Buss, 2017. "Institutional Investors and Information Acquisition: Implications for Asset Prices and Informational Efficiency," Carlo Alberto Notebooks 524, Collegio Carlo Alberto.

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