The Financial Intermediation Premium in the Cross Section of Stock Returns

62 Pages Posted: 6 Nov 2017 Last revised: 8 Nov 2017

Date Written: August 2, 2017

Abstract

This paper documents a significant risk premium for financial intermediation risk in the cross section of equity returns. Firms that borrow from highly levered financial intermediaries have on average 4% higher expected returns relative to firms with low-leverage lenders. This difference cannot be attributed to differences in firm characteristics and is driven by firms' exposure to the financial sector. The dispersion in the leverage of financial intermediaries in the debt market forecasts the growth of macroeconomic aggregates. To shed light on the underlying mechanism behind the intermediation risk, I provide a tractable model with state-dependent borrowing costs.

Keywords: financial intermediation, risk premium

JEL Classification: G12, G21

Suggested Citation

Marchuk, Tatyana, The Financial Intermediation Premium in the Cross Section of Stock Returns (August 2, 2017). Available at SSRN: https://ssrn.com/abstract=3062518 or http://dx.doi.org/10.2139/ssrn.3062518

Tatyana Marchuk (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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