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Intermediary Asset Pricing

  • Arvind Krishnamurhty

    (Northwestern University)

  • Zhiguo He

    (University of Chicago)

Registered author(s):

    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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    File URL: https://www.economicdynamics.org/meetpapers/2010/paper_1327.pdf
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    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
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    19. Boudoukh, Jacob, et al, 1997. "Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 405-46.
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