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File name: SSRN-id2030298. ; Size: 320K
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Financial Intermediaries and the Cross-Section of Asset Returns
Tyler Muir
Northwestern University - Kellogg School of Management - Department of Finance
Tobias Adrian
Federal Reserve Bank of New York
Erkko Etula
affiliation 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 series
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Date posted: March 23, 2011
; Last revised: March 28, 2012
Suggested CitationMuir, Tyler, Adrian, Tobias and Etula, Erkko, Financial Intermediaries and the Cross-Section of Asset Returns (March 14, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1786061 or http://dx.doi.org/10.2139/ssrn.1786061
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