Intermediary asset pricing: New evidence from many asset classes

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 mar...

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Bibliographic Details
Published in:Journal of financial economics 2017-10, Vol.126 (1), p.1-35
Main Authors: He, Zhiguo, Kelly, Bryan, Manela, Asaf
Format: Article
Language:English
Subjects:
Asset pricing
Bond markets
Capital ratios
Equity capital
Government bonds
Intermediary capital
Leverage
Leverage cycles
Portfolios
Power
Prices
Primary dealers
Sophisticated asset classes
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2017.08.002