Procyclical Leverage in Europe and its Role in Asset Pricing

34 Pages Posted: 12 Apr 2019

See all articles by Markus Baltzer

Markus Baltzer

Deutsche Bundesbank

Alexandra Koehl

Allianz Global Investors

Stefan Reitz

University of Kiel

Date Written: 2019

Abstract

Broker-dealer leverage has recently proven to be strongly procyclical, exhibiting impressive explanatory power for a large cross-section of asset returns in the US. In this paper we add empirical evidence to this finding, showing that European and German broker-dealers actively manage their balance sheets. Moreover, by applying standard Fama-MacBeth regressions as well as dynamic asset pricing models (Adrian, Crump, and Moench, 2015), we confirm the importance of brokerdealer balance-sheet indicators for asset pricing. In particular, leverage shows a procyclical behavior with a positive price of risk. Moreover, high leverage coincides with high asset prices, thereby forecasting lower future returns.

Keywords: broker-dealer leverage, intermediary asset pricing, dynamic asset pricing

JEL Classification: E31, G21

Suggested Citation

Baltzer, Markus and Koehl, Alexandra and Reitz, Stefan, Procyclical Leverage in Europe and its Role in Asset Pricing (2019). Deutsche Bundesbank Discussion Paper No. 10/2019, Available at SSRN: https://ssrn.com/abstract=3368360 or http://dx.doi.org/10.2139/ssrn.3368360

Markus Baltzer (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Alexandra Koehl

Allianz Global Investors ( email )

Frankfurt am Main, Hessen
Germany

Stefan Reitz

University of Kiel

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

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