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Financial Intermediaries and the Cross-Section of Asset ReturnsTyler MuirNorthwestern University - Kellogg School of Management - Department of Finance Tobias AdrianFederal Reserve Bank of New York Erkko Etulaaffiliation not provided to SSRN March 14, 2011 AFA 2012 Chicago Meetings Paper 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 multi-factor benchmarks designed to price these assets.
Number of Pages in PDF File: 55 Keywords: cross sectional asset pricing, financial intermediation JEL Classification: G1, G12, G21 working papers seriesDate posted: March 23, 2011 ; Last revised: March 28, 2012Suggested CitationContact Information
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