Concentrated Ownership and Equilibrium Asset Prices ∗

Investors can choose to hold diversified or levered, concentrated portfolios of risky assets. This paper studies the dynamics of asset prices in an economy in which both investment styles coexist in equilibrium even though all agents are ex-ante identical. I capture the tradeoff between risk sharing and productivity gains by introducing what I call “active capital.” People who participate in such investments are restricted in their outside opportunities but receive extra compensation for the productivity gains they bring to the corresponding enterprises. I show that fluctuations in the quantity of active capital increase the volatility of asset prices relative to a standard economy. Not all shocks shift the distribution of ownership: risk considerations determine the willingness to provide active capital, whereas current and expected future economic activity do not play a role. Therefore, active capital fluctuates jointly with risk premia, amplifying their variations. As a consequence, the price of volatility risk exposure can be large, and return volatility is mainly induced by fluctuations in future expected returns. These results are particularly strong when fundamental volatility is low, because at such times, a large number of concentrated owners are likely to exit their positions and sell off their assets. ∗I thank my dissertation advisors Lars Hansen, Zhiguo He, Stavros Panageas, and Pietro Veronesi for their continuous guidance. I am grateful for comments and suggestions from Marianne Andries, Nina Boyarchenko, Jake Favilukis, John Heaton, Ralph Koijen, Serhiy Kozak, Bart Lambrecht, Erik Loualiche, Alan Moreira, Matthew Plosser, Shri Santosh, Harald Uhlig, and to seminar participants at the University of Chicago, MIT Sloan, UCLA Anderson, Princeton, Wharton, UT Austin McCombs, Northwestern Kellogg, Boston University SOM, Duke Fuqua, Wisconsin School of Business, Stanford, Toulouse School of Economics, SED conference, EFA meetings and Princeton-Cambridge meetings. Research support from the Sanford J. Grossman Fellowship in Honor of Arnold Zellner and from the Stevanovich Center for Financial Mathematics is gratefully acknowledged. Any opinions expressed herein are the author’s and not necessarily those of these individuals and institutions. †Princeton University, [email protected].