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Financial Intermediaries and the Cross-Section of Asset Returns

Tobias Adrian

Federal Reserve Bank of New York

Erkko Etula


Tyler Muir

Yale University

March 14, 2011

Journal of Finance, December 2014
AFA 2012 Chicago Meetings Paper

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: 58

Keywords: cross sectional asset pricing, financial intermediation

JEL Classification: G1, G12, G21

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Date posted: March 23, 2011 ; Last revised: November 20, 2014

Suggested Citation

Adrian, Tobias and Etula, Erkko and Muir, Tyler, Financial Intermediaries and the Cross-Section of Asset Returns (March 14, 2011). Journal of Finance, December 2014; AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1786061 or http://dx.doi.org/10.2139/ssrn.1786061

Contact Information

Tobias Adrian
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://nyfedeconomists.org/adrian/
Erkko Etula
Independent ( email )
No Address Available
United States
Tyler Muir (Contact Author)
Yale University ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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