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
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: Suggested Citation