Capital allocation follows return expectations, leading to sectoral imbalances.
Investor psychology significantly influences market stability.
Uncontrolled capital flows can distort the real economy.
Opinion
This study provides a quantitative framework for understanding how financial markets influence real economic conditions. It reinforces the importance of regulatory oversight to prevent excessive capital concentration and mitigate financial instability.
Core Sell Point
Investor sentiment and expectations play a crucial role in capital allocation, affecting both financial stability and real economic outcomes.
This study presents a formal model for understanding the complex interactions between financial markets and the real economy, particularly focusing on capital allocation and accumulation dynamics.
Sectoral Capital Allocation
The number of firms in each sector depends on total financial capital invested and expected long-term returns.
Investors tend to allocate more capital to sectors with higher expected returns.
Capital Accumulation Patterns
Short-term & long-term profitability drive sectoral capital accumulation.
Capital inflows tend to favor sectors with relatively higher returns compared to adjacent sectors.
Three Major Capital Accumulation Patterns
Low-capital, high short-term returns (early-stage, stable industries).
Medium/high-capital, mixed short- & long-term returns (active capital accumulation).
High-capital, long-term return driven (potential for unlimited growth but higher instability).
Expectation Formation & Stability
High-reactivity expectations stabilize capital distribution.
Fluctuations in financial expectations directly influence the real economy.
Excessive capital flows into specific sectors can distort economic fundamentals and increase systemic risk.
This study highlights how investor sentiment and expectations shape capital flows, impacting both financial market stability and real economic outcomes. Effective regulation is essential to mitigate excessive capital concentration in speculative sectors and maintain long-term economic stability.
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