Financial Expertise and Asset Prices

This paper studies the effects of the joint distribution of the stock financial expertise and financial wealth on asset prices. By modeling financial expertise as a stock, we are able to incorporate economic ideas from capital theory as well as industrial organization into a model with slow moving capital. We aim to explain the persistence of risky arbitrage opportunities by modeling the entry and investment decisions of ``financial experts''. Our theory also naturally yields size and performance distributions for experts, and we will use empirical distributions from the hedge fund industry to help to calibrate our model.