040071 SE Seminar (MA) (2023W)

Standard models of asset pricing build on the fiction of large crowds of small, and, hence, non-strategic investors acting as price takers. Accordingly, in equilibrium assets are priced relative to investors’ marginal rates of substitution at their equilibrium holdings.

Of course, real world markets are populated with large investors with market power, who can strategically affect prices. The whole purpose of hedge funds and short sellers, for example, is to profit from price manipulation. But also long-term investors such as life insurers, ETF providers or wealth managers exert substantial influence on securities’ pricing. While activist investors target the investment policies of specific corporations, large common owners such as Blackrock, State Street and Vanguard might feel tempted to coordinate, and possibly relax, the intensity of competition in global product markets.

Will society benefit from the coordinating role of common owners in producing information and internalizing externalities, or will the tendency towards cartelization and monopolization increase firm profits at the expense of reduced economic innovation and growth?

These are pressing questions of current cutting-edge research in asset pricing. The seminar provides an introduction into and orientation within this rapidly expanding literature. As such it serves also as an introduction for topics that can be pursued in independent research while drafting a master thesis.