Slow-Moving Capital and Stock Returns

We consider an economy where investors trade on the stock market with capital that they allocate with delays.We find a linear equilibrium in this economy and calibrate the slow capital movement by using the Sharpe ratio and a portfolio turnover that have been historically observed. We show that, in agreement with empirical literature, our model predicts a short-term stock price reversal. This prediction is robust under sensitivity analysis. We also show that the conditional Sharpe ratio moves strongly against the aggregate consumption with the volatility being close to its historical value. Furthermore, the delays in capital allocations make volatility of the aggregate consumption decrease substantially while resulting in a significantly higher Sharpe ratio and a dramatically higher volatility of stock returns than in the economy with no capital delays.