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Intermediary Asset Pricing

  • Zhiguo He
  • Arvind Krishnamurthy
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    We model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. Intermediaries face an equity capital constraint. Risk premia rise when the constraint binds, reflecting the capital scarcity. The calibrated model matches the nonlinearity of risk premia during crises and the speed of reversion in risk premia from a crisis back to precrisis levels. We evaluate the effect of three government policies: reducing intermediaries borrowing costs, injecting equity capital, and purchasing distressed assets. Injecting equity capital is particularly effective because it alleviates the equity capital constraint that drives the model's crisis. (JEL E44, G12, G21, G23, G24)

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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 103 (2013)
    Issue (Month): 2 (April)
    Pages: 732-70

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    Handle: RePEc:aea:aecrev:v:103:y:2013:i:2:p:732-70
    Note: DOI: 10.1257/aer.103.2.732
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    1. Chris Edmond & Pierre-Olivier Weill, 2011. "Aggregate Implications of Micro Asset Market Segmentation," Department of Economics - Working Papers Series 1117, The University of Melbourne.
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