Financial Intermediaries and the Cross-Section of Asset Returns

58 Pages Posted: 23 Mar 2011 Last revised: 20 Nov 2014

Tobias Adrian

International Monetary Fund

Erkko Etula

Independent; New York University (NYU) - Leonard N. Stern School of Business

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Date Written: March 14, 2011

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.

Keywords: cross sectional asset pricing, financial intermediation

JEL Classification: G1, G12, G21

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: https://ssrn.com/abstract=1786061 or http://dx.doi.org/10.2139/ssrn.1786061

Tobias Adrian

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Erkko Etula

Independent ( email )

No Address Available

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
704
Rank
28,312
Abstract Views
3,762