The Leverage Bearing Capacity: A New Tool for Intermediary Asset Pricing

46 Pages Posted: 19 Nov 2020

See all articles by Thomas Grünthaler

Thomas Grünthaler

University of Muenster - Finance Center Muenster

Friedrich Lorenz

University of Muenster - Finance Center Muenster

Paul Meyerhof

University of Muenster - Finance Center Muenster

Date Written: October 26, 2020

Abstract

We introduce a new proxy for the health of financial intermediaries—the Leverage Bearing Capacity (LBC). LBC is the leverage of a fictitious intermediary that targets a fixed level of risk and rebalances its capital structure on an ongoing basis. Our proposed measure is based on market values, available at any frequency, forward-looking, and relies solely on no-arbitrage. Building on an intermediary asset pricing model, we validate LBC theoretically and show that it proxies the marginal wealth of intermediaries. We conduct two event studies to highlight that LBC incorporates uncertainty about the assets of financial intermediaries. Lastly, we show that these features translate into superior asset pricing performance.

Keywords: Intermediary asset pricing, financial intermediation, option-implied information, leverage, financial constraints, risk-bearing capacity, balance sheet valuation

JEL Classification: G12, G13, G20, G32

Suggested Citation

Grünthaler, Thomas and Lorenz, Friedrich and Meyerhof, Paul, The Leverage Bearing Capacity: A New Tool for Intermediary Asset Pricing (October 26, 2020). Available at SSRN: https://ssrn.com/abstract=3719019 or http://dx.doi.org/10.2139/ssrn.3719019

Thomas Grünthaler

University of Muenster - Finance Center Muenster ( email )

Universitätsstraße 14-16
Muenster, D-48143
Germany

Friedrich Lorenz

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Paul Meyerhof (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

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