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Intermediary Asset Pricing

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  • Arvind Krishnamurhty

    (Northwestern University)

  • Zhiguo He

    (University of Chicago)

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    Abstract

    We study the dynamics of risk premia during crises where financial intermediaries faces constraints on raising equity capital. Risk premia rise when intermediaries' equity capital is scarce. We calibrate the model to match two aspects of crises: the nonlinearity of risk premia during crisis episodes, and the speed of adjustment in risk premia from a crisis back to pre-crisis levels. We quantitatively evaluate the effectiveness of several central bank policies. Infusing equity capital into intermediaries is particularly effective because it attacks the capital constraint that is at the root of the crisis in our model.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1327.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:1327

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    8. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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    Cited by:
    1. Edmond, Chris & Weill, Pierre-Olivier, 2012. "Aggregate implications of micro asset market segmentation," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 319-335.
    2. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2013. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 159 - 214.
    3. Michael Bleaney & Paul Mizen & Veronica Veleanu, 2013. "Bond Spreads and Economic Activity in Eight European Economies," Discussion Papers 2013/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    4. Robin Greenwood & Samuel G. Hanson, 2011. "Issuer Quality and the Credit Cycle," NBER Working Papers 17197, National Bureau of Economic Research, Inc.
    5. Michael Bleaney & Paul Mizen & Veronica Veleanu, . "Bond Spreads as Predictors of Economic Activity in Eight European Economies," Discussion Papers 12/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    6. Matteo Maggiori, 2012. "Financial Intermediation, International Risk Sharing, and Reserve Currencies," 2012 Meeting Papers 146, Society for Economic Dynamics.

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