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Intermediary asset pricing: New evidence from many asset classes

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  • He, Zhiguo
  • Kelly, Bryan
  • Manela, Asaf

Abstract

We find that shocks to the equity capital ratio of financial intermediaries—Primary Dealer counterparties of the New York Federal Reserve—possess significant explanatory power for cross-sectional variation in expected returns. This is true not only for commonly studied equity and government bond market portfolios, but also for other more sophisticated asset classes such as corporate and sovereign bonds, derivatives, commodities, and currencies. Our intermediary capital risk factor is strongly procyclical, implying countercyclical intermediary leverage. The price of risk for intermediary capital shocks is consistently positive and of similar magnitude when estimated separately for individual asset classes, suggesting that financial intermediaries are marginal investors in many markets and hence key to understanding asset prices.

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  • He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
  • Handle: RePEc:eee:jfinec:v:126:y:2017:i:1:p:1-35
    DOI: 10.1016/j.jfineco.2017.08.002
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    More about this item

    Keywords

    Sophisticated asset classes; Primary dealers; Intermediary capital; Leverage cycles;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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