IFFINMAR · Informational Frictions in Financial Markets
FP7 — People (Marie Curie Actions)
- Duration
- 2014-04-01 → 2018-03-31
- EU contribution
- €100,000
- Participants
- 1
- Scheme
- MC-CIG
Lines connect the coordinator with its partners.
Results in brief
Informational Frictions in Financial Markets
The main goal of my research was to understand the information acquisition process and its impact on various economic phenomena. In the first project, I have studied the process of information acquisition in light of the theory of mutual funds. The main idea is that mutual funds operate under information capacity constraints and thus must decide how to choose their capacity optimally. In this project, I show that the allocation of attention to macro and micro shocks depends critically on the quantity of risk and the price of risk in the market. The higher is the aggregate risk and the price of risk the more attention is allocated to macro/large shocks. In the second project, I aimed to understand the role of investor sophistication for the formation of capital income inequality. The paper develops a multi-agent and multi-asset general equilibrium framework with information capacity constraints. The main theoretical predictions help understand the role of changes in aggregate information capacity on the evolution of capital income inequality and micro found this using portfolio decisions. The main intuition of the model is that investors with more information capacity tend to invest in assets with higher volatility, and thus capture the benefits of higher risk premia of such assets. Less sophisticated agents are priced out by such sophisticated investors and thus they generate lower returns in equilibrium. The model is calibrated using the data on U.S. household income from the Survey of Consumer Finances and its ability to explain the data is remarkably high. Progress and results: Progress on my initial plan has been good during the grant period. In the first grant period, I managed to finalize my project on Attention Allocation over the Business Cycle. The paper is now published at Econometrica, the leading journal in economics. In the second grant period, I advanced the publication process of my second paper on Investor Sophistication and Capital Income Inequality. The paper is now in a late stage review process at the Journal of Monetary Economics, which is a leading journal for macroeconomists and one of the top journals in broad economics field. In addition to my planned projects, during the entire grant period I have managed to start a number of new projects. Those were not initially planned for but were significant follow-ups to the ones I discuss above. In particular, I have written a theory paper on Market Impact and Price Informativeness and Foreign and an empirical paper on Foreign Investors and Market Efficiency. Both papers are now almost finished and ready for the initial submission to top academic journals. Potential impact: Overall, I think both works are high impact pieces. The published Econometrica work has been a state-of-the-art framework for many successful academic discoveries and has also started a rich academic discussion on the role of information in asset management. The unpublished work has a significant role in the current debate on the sources and causes of income inequality. To date, we understand the data more and more, but what is missing is the presence of micro-founded theoretical frameworks that could allow for policy implications. I hope the project will serve this role. I believe that both these projects have significantly enhanced my visibility in the profession.
Data: CORDIS, © European Union
Project objective
My research studies the impact of informational frictions on financial markets. In a frictionless market all economic agents have the same access to information. However, such homogeneity is often violated either because some agents have more information or they can better process it. A source of such informational advantage could be superior ability or financial skills. Naturally such skills are likely to be concentrated among institutional investors. But academic research shows that institutional investors do not generate better outcomes. My research argues that a subset of actively managed mutual fund managers can outperform passive benchmarks, and other investors, because they can choose better stocks or better time the changes in aggregate market conditions. These differences in investment skills have permanent effects on the ex-post performance of these investors. Identifying skilled investors undermines the postulates of efficient markets and provides useful tool for households to make efficient financial decisions. Another source of friction could be institutional differences fostering incentives to acquire and process information. For example I show that the degree of centralization or business concerns inside organizations affect incentives to acquire information and take excessive risk. Informational frictions can also result from the illegal acquisition of inside information. In my current work I want to understand the role of illegal insider trading for price formation and the overall quality of information in financial markets. On a broader level I study the implications of informational frictions for the growing income inequality between rich and poor. To explain why the inequality grows I show that some agents are endowed with more resources to access beneficial information and thus can enhance their capital gains and total income. Overall, my primary aim is to understand the role informational frictions play in both micro and macroeconomic arenas.
Original text from CORDIS.
Participants
- IMPERIAL COLLEGE OF SCIENCE TECHNOLOGY AND MEDICINE · LondonCoordinatorUnited Kingdom
Links
Data: CORDIS, © European Union