Financial Intermediary Leverage, Volatility, and the Cross-Section of Asset Returns

29 Pages Posted: 25 Jun 2021

Date Written: June 20, 2021

Abstract

Society needs financial intermediaries to create orderly efficient markets, to have informative prices, and to best allocate resources. However, when trust is eroded with high volatility and unpredictable events, financial crises are amplified and prices are distorted as financial intermediaries struggle to hold rapidly depreciating assets that are essential for economic recovery. Using a multi-factor model, I find that intermediary leverage, volatility, and more importantly their interaction, explain cross-sectional variations in expected returns. I propose an advancement based on the joint interaction between intermediary leverage and volatility to enable financial intermediaries to better manage their leverage in a rapidly evolving risk environment.

Keywords: cross sectional asset pricing, financial intermediation, leverage ratio

JEL Classification: G01, G12, G21

Suggested Citation

Chan, Skyler, Financial Intermediary Leverage, Volatility, and the Cross-Section of Asset Returns (June 20, 2021). Available at SSRN: https://ssrn.com/abstract=3856777 or http://dx.doi.org/10.2139/ssrn.3856777

Skyler Chan (Contact Author)

Independent ( email )

6128392607 (Phone)

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