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Intermediary leverage shocks and funding conditions

Author

Listed:
  • Jean-Sébastien Fontaine

    (Bank of Canada - Bank of Canada)

  • René Garcia

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UdeM - Université de Montréal)

  • Sermin Gungor

    (Bank of Canada - Bank of Canada)

Abstract

The aggregate leverage of broker-dealers responds to demand and supply disturbances that have opposite effects on financial markets. Leverage supply shocks that relax broker-dealers' funding constraints raise leverage, improve liquidity, increase returns and carry a positive price of risk. Leverage demand shocks also raise leverage but worsen liquidity, reduce returns and carry a negative price of risk. Disentangling demand-and supply-like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.

Suggested Citation

  • Jean-Sébastien Fontaine & René Garcia & Sermin Gungor, 2025. "Intermediary leverage shocks and funding conditions," Post-Print hal-05290285, HAL.
    • Handle: RePEc:hal:journl:hal-05290285
    DOI: 10.1111/jofi.13407
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