Intermediary Leverage and the Cross-Section of Expected Returns

41 Pages Posted: 7 Jun 2010 Last revised: 9 Jun 2010

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: May 31, 2010

Abstract

I find that an asset's expected return is largely explained by its covariance with intermediary leverage for a broad cross-section of returns. A one-factor leverage model performs as well as standard multi-factor models on most dimensions and in particular helps explain the 30 Industry and 10 Momentum portfolios. I consider two alternative views of how intermediary leverage is informative for asset prices: (1) the market segmentation view in which intermediaries are the agents relevant for pricing and leverage measures their marginal value of wealth and (2) the reflection of risk premia view in which consumers are the agents relevant for pricing and leverage reflects time-varying risk aversion. I find support for both views.

Keywords: Asset Pricing, Financial Intermediation

Suggested Citation

Muir, Tyler, Intermediary Leverage and the Cross-Section of Expected Returns (May 31, 2010). Available at SSRN: https://ssrn.com/abstract=1618587 or http://dx.doi.org/10.2139/ssrn.1618587

Tyler Muir (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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