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Broker-Dealer Leverage and the Cross-Section of Stock Returns

Listed author(s):
  • Tyler Muir

    (Northwestern University)

  • Erkko Etula

    (Federal Reserve Bank of New York)

  • Tobias Adrian

    (Federal Reserve Bank of New York)

We document that average stock returns can be largely explained by their covariance with shocks to the aggregate leverage of security broker-dealers. Our single-factor leverage model compares favorably with standard multi-factor models in the cross-section of size and book-to-market portfolios and outperforms such models when considering momentum, industry, and Treasury bond portfolios. We interpret the risk captured by shocks to broker-dealer leverage as a reflection of unexpected changes in broader economic conditions.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_1448.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1448.

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Date of creation: 2011
Handle: RePEc:red:sed011:1448
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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