Raluca TOMA, University of Lausanne, Department of Finance
Asset Prices and Trading Volume with Delegation
I build a dynamic general equilibrium model of delegation where the fund manager faces an equity constraint, in the spirit of He and Krishnamurthy (2013). When the constraint binds, the model delivers a lower interest rate, a higher risk premium, and a larger stock trading volume. When the constraint does not bind, trading fund shares allows agents to achieve first-best allocations with low trading volume. Therefore, in an economy with costly trade, liquidity is likely to increase. The effect is expected to weaken when the constraint binds, as all trading is through the stock market.