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Session Overview
APT 02: Asset Pricing and Capital Market Frictions
Thursday, 26/Aug/2021:
5:30pm - 7:00pm

Session Chair: Stavros Panageas, UCLA Anderson School of Management
Location: Stream 04

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ID: 236

Barriers to Global Capital Allocation

Bruno Pellegrino1, Enrico Spolaore2, Romain Wacziarg3

1University of Maryland; 2Tufts University; 3UCLA

Discussant: Moritz Lenel (Princeton University)

We quantify the impact of barriers to international investment, using a novel multi-country dynamic general equilibrium model with heterogeneous investors and imperfect capital mobility. Our model yields a gravity equation for bilateral foreign asset positions. We estimate this gravity equation using recently-developed foreign investment data that have been restated to account for offshore investment and financing vehicles. We show that a parsimonious implementation of the model with four barriers (geographic distance, cultural distance, foreign investment taxation, and political risk) accounts for a large share of the observed variation in bilateral foreign investment positions. Our model predicts (out of sample) a significant home bias, higher rates of return on capital in emerging markets, as well as “upstream” capital flows. In our benchmark calibration, we estimate that the capital misallocation induced by these barriers reduces World GDP by 7%, compared to a situation without barriers. We also find that barriers to global capital allocation contribute significantly to cross-country inequality: the standard deviation of log capital per employee is 80% higher than it would be in a world without barriers to international investment, while the dispersion in output per employee is 42% higher.

236-APT-EFA2021-Barriers to Global Capital Allocation.pdf

ID: 584

Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Bruno Biais

HEC Paris

Discussant: Alexander Zentefis (Yale School of Management)

Incentive problems make securities' payoffs imperfectly pledgeable, limiting agents' ability to issue liabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a dynamic exchange economy. Because markets are endogenously incomplete, agents have different intertemporal marginal rates of substitution, so that they value assets differently. Consequently, agents hold different portfolios. This leads to endogenous markets segmentation, which we characterize with Optimal Transport methods. Moreover, there is a basis going always in the same direction: the price of a security is lower than that of replicating portfolios of long positions. Finally, equilibrium expected returns are concave in factor loadings.

584-APT-EFA2021-Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing.pdf

ID: 1893

Capital Commitment

Elise Gourier1, Ludovic Phalippou2, Mark Westerfield3

1ESSEC; 2Saïd Business School, United Kingdom; 3University of Washington

Discussant: Michael Ewens (California Institute of Technology)

Ten trillion dollars are allocated to illiquid vehicles for which investors commit ex-ante to transferring capital on demand -- most of which are Private Equity (PE) funds. We show within a novel dynamic portfolio allocation model that ex-ante commitment has large effects on investors’ portfolios and welfare, and we quantify those effects. Investors are under-allocated to PE and are willing to pay a larger premium to adjust the quantity committed than to eliminate other liquidity frictions -- timing uncertainty and the limited tradability of PE investments. Counter-intuitively, commitment risk premiums increase with secondary market liquidity and they do not disappear even if investments are spread over an infinity of funds.

1893-APT-EFA2021-Capital Commitment.pdf

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