Capital Mobility and Asset Pricing

We present a model for the equilibrium movement of capital between markets. Markets with symmetrically distributed risks are distinguished only by the levels of capital invested in each. That market with the greater amount of capital earns lower conditional mean returns. Intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return. Those fees also depend on the bargaining power of the investor, in light of potential alternative intermediaries. In equilibrium, the speed of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets. We are grateful for reactions at Oxford University, the 2007 Gerzensee European Summer Symposium in Financial Markets, the University of Toulouse, The London School of Economics, London Business School, and especially for comments from Bruno Biais, Eddie Dekel, Julien Hugonnier, Glen Weyl, Jean Tirole, Jean-Charles Rochet, Larry Samuelson, and Dimitri Vayanos. We are thankful for the research assistance of Sergey Lobanov.