Articlegreen2014

Financial Intermediaries and the Cross‐Section of Asset Returns

Tobias Adrian · Erkko M. Etula · Tyler Muir

847 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

ABSTRACT Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker‐dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and high marginal value of wealth. Our single‐factor model prices size, book‐to‐market, momentum, and bond portfolios with an R2 of 77% and an average annual pricing error of 1%—performing as well as standard multifactor benchmarks designed to price these assets.

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References

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Cited by

2017Intermediary asset pricing: New evidence from many asset classes 2020Taming the Factor Zoo: A Test of New Factors 2018Deviations from Covered Interest Rate Parity 2017Short and Long Horizon Behavioral Factors 2011A Model of Capital and Crises 2017Financial Intermediation, International Risk Sharing, and Reserve Currencies 2014Conditional risk premia in currency markets and other asset classes

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