Heterogeneous intermediaries and asset prices by sai ma. Intermediary managers wealth constrains size of intermediarys overall equity, for moral hazard reasons. Some of these models build in a role for intermediaries as well as consumers. We model the dynamics of risk premia during crises in asset markets where the. Intermediary asset pricing request pdf researchgate. Intermediarybased asset pricing and the crosssections of. Intermediary asset pricing in commodity futures returns. Intermediary based asset pricing intermediary based asset pricing is an active line of research, both theoretical and empirical, which emphasizes the central role of financial intermediaries for asset prices and real outcomes builds on old idea of the financial acceleratorof bernanke and. Literature on intermediary asset pricing, the net worth models he and krishnamurthy 20. Pdf do intermediaries matter for aggregate asset prices.
Request pdf intermediary asset pricing and the financial crisis intermediary asset pricing understands asset prices and risk premia through the lens of frictions in financial intermediation. Intermediary variable description value riskaversion 0 i numbers 2,20 entrepreneurs variable description value riskaversion 1 elasticity 10, number 2 e0d. Jan 30, 2020 this paper assesses the extent to which intermediary capital ic risk contributes toward explaining commodity futures returns. Intermediary asset pricing and the financial crisis university of.
Our second choice is guided by the recent intermediary asset pricing models ofhe and kr ishnamurthy20,2012 andbrunnermeier and sannikov2014, which follow the tradition of bernankeandgertler1989andholmstromandtirole1997. Intermediarybased asset pricing and the crosssections of exchange rate returns job market paper link to most recent version andy pham november 14, 2018 abstract i investigate whether uctuations in the capital ratio of nancial intermediaries provide an economic source of risk for the various crosssections of exchange rate returns. Canonical intermediary asset pricing models assume a representative intermediary with an sdf linear in its leverage. In this paper we propose a model that incorporates both the. Risk premia rise when the constraint binds, reflecting the capital scarcity. Existing studies find that intermediary balance sheets are strongly correlated with asset returns, but it is still unclear whether or how much fluctuations in intermediaries health matter for aggregate asset prices rather than simply being correlated with aggregate risk aversion. Connolly,b and chris stiversc a john cook school of business saint louis university b kenanflagler business school university of north carolina at chapel hill c college of business university of louisville november 29, 2018. New evidence from many asset classes zhiguo he, bryan kelly, and asaf manela nber working paper no. Our paper belongs to a burgeoning literature on intermediary asset pricing, which highlights the pricing kernel of. Positive pricesof intermediary capital risk for all asset classes i intermediary values a dollar more inlow capital. This article explains the theory behind intermediary asset pricing and in particular how it is. Newer asset pricing models allow for limits to arbitrage, such as an inability to borrow or lend large amounts of money at the riskfree rate. Louis, mo 63, usa abstract we nd that shocks to the equity.
Run intermediaries subject to an intermediation constraint households investment cannot exceed a capacity, which is increasing in intermediarys specialists capital risky asset. Intermediary asset pricing by zhiguo he and arvind krishnamurthy. Discussion of do intermediaries matter for aggregate asset. As noted in section 3, the constraint on nych banks appears to be distinct from the frictions studied in most other intermediary asset pricing theories. In other words, a funds oversight program should aim to ensure an understanding and awareness. Intermediary asset pricing zhiguo he and arvind krishnamurthy nber working paper no. Intermediary asset pricing by zhiguo he and arvind krishnamurthy we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. Traders in financial futures explanatory notes the traders in financial futures tff, announced by the commodity futures trading commission cftc on july 22, 2010, builds on improvements to transparency implemented in 2009 that disaggregated data in the cftcs weekly commitments of traders cot reports.
This paper assesses the extent to which intermediary capital ic risk contributes toward explaining commodity futures returns. High expectedvolatility thresholds, factor premia, and. I financial intermediary asset pricing an intermediary pricing kernel arises if the balance sheet capacity of intermediaries directly impacts asset price dynamics, as is the case in the literature on limits to arbitrage. Intermediary asset pricing understands asset prices and risk premia through the lens of frictions in financial intermediation. Theory of intermediary asset pricing w agg e ects e. Asset pricing when intermediaries have market power. Heterogeneous intermediaries and asset prices by sai ma ssrn. G01,g2,g28 abstract we present a model to study the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. This article explains the theory behind intermediary asset pricing and, in particular, how it is different from other.
Different pricing more directtoconsumer sales more automation investor data as a core asset activism and socialimpact investing more publicprivate portfolios. Positive prices of intermediary capital risk for all asset classes. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastestgrowing areas of research in finance. Intermediarybased asset pricing and the crosssections of exchange rate returns job market paper andy pham october 4, 2018 abstract i investigate whether uctuations in the capital ratio of nancial intermediaries provide an economic source of risk for the various cross. The tff report, however, is not a disaggregation of the cot data for the financial futures markets. Models to connect phenomena to macro data on crises and macro outcomes.
Louis, mo 63, usa abstract we nd that shocks to the equity capital. This article aims to introduce the reader to the growing literature on intermediary asset pricing, which links movements in asset prices and risk premia to frictions in. Intermediaries face a constraint on raising equity. Intermediary asset pricing theories offer a new perspective for understanding risk premia.
Financial intermediaries and the crosssection of asset. Do intermediaries matter for aggregate asset prices. Intermediary asset pricing during the national banking era. The primary focus is to ensure that funds are not engaging in distribution in guise outside of the framework of a rule 12b1 distribution fee plan. We find that shocks to the equity capital ratio of financial intermediariesprimary dealer. Two elements shape if and how intermediaries matter for asset prices. New evidence from many asset classes i zhiguo he a, bryan kelly a, asaf manela b a university of chicago, booth school of business, and nber, 5807 s woodlawn ave, chicago, il 60637, usa b washington university, olin business school, one brookings dr, st. Intermediary asset pricing and the financial crisis request pdf. Intermediary based asset pricing and the crosssections of exchange rate returns job market paper andy pham october 4, 2018 abstract i investigate whether uctuations in the capital ratio of nancial intermediaries provide an economic source of risk for the various crosssections of exchange rate returns. Intermediary asset pricing zhiguo he arvind krishnamurthy november 20, 2008 abstract we study the dynamics of risk premia during crises where nancial intermediaries faces constraints on raising equity capital. The intermediary asset pricing theory see he and krishnamurthy 2012, 20, and brun nermeier and sannikov 2014 asserts that the marginal utility of every dollar nanced by we are grateful to matthew spiegel, maureen ohara, tony he, youwei li, and participants of the 2017.
The editor of the journal of financial economics highlighted article from the latest published issue of the journal intermediary asset pricing. The calibrated model matches the nonlinearity of risk premia during crises and the speed of reversion in risk premia from a crisis. Intermediary asset pricing olin business school washington. I crosssectional asset pricing tests for each asset classseparately. Valentin haddad and tyler muir october 1, 2017 abstract we propose a simple framework for intermediary asset pricing. Intermediary asset pricing american economic association. We present a model to study the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. In this paper we propose a model that incorporates both the possibility that intermediaries matter for asset. Intermediary asset pricing and the financial crisis zhiguohe arvindkrishnamurthy. The traders classified into one of the four categories in the tff report may be drawn from either the commercial or noncommercial. Intermeidary asset pricing highlights sdf of intermediary.
Intermediary asset pricing is really a pragmatic and empirical one, based on the conjecture that relatively well measured nancial intermediary data is more closely related to asset prices than poorly measured consumption data. We model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. These theories are predicated on the fact that financial intermediaries. Intermediary asset pricing in commodity futures returns yin. In such frameworks, the leverage of nancial intermediaries measures the tightness of intermediary funding constraints and. May 11, 2017 newer asset pricing models allow for limits to arbitrage, such as an inability to borrow or lend large amounts of money at the riskfree rate. New evidence from many asset classes zhiguo he university of chicago and nber. New evidence from many asset classes zhiguo he university of chicago and nber bryan kelly university of chicago and nber asaf manela washington university in st. Intermediary asset pricing simon fraser university. Financial intermediaries and the crosssection of asset returns. Intermediary based asset pricing and the crosssections of exchange rate returns job market paper link to most recent version andy pham november 14, 2018 abstract i investigate whether uctuations in the capital ratio of nancial intermediaries provide an economic source of risk for the various crosssections of exchange rate returns. The second departure from existing intermediary asset pricing models is the type of frictions facing intermediaries.
We find that the ic effect is substantially positive and continues to grow as the financialization of commodities deepens. February 27, 2012 abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a. Intermediary asset pricing and the financial crisis. Intermediary asset pricing zhiguo he arvind krishnamurthy. Intermediary asset pricing is a branch of heterogeneous agent ap in heterogenous agent models e. We use the model to quantitatively evaluate the effectiveness of a variety of central bank policies, including reducing intermediaries borrowing costs, infusing equity capital, and directly intervening in distressed asset markets. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastest growing areas of research in finance. Limited participation in risky asset market specialists. Risk premia rise when intermediariesequity capital is scarce. The intermediary asset pricing theory changes the former discourse by replacing the households as marginal investors with the financial intermediaries e. Accepted manuscript accepted manuscript intermediary asset pricing.
Most forms of the capital asset pricing model assume that price differences can be effortlessly arbitraged away. Models of intermediary asset pricing data linking intermediary frictions to asset prices good case studies how much does it matter for aggregate asset prices. Virtually all intermediary asset pricing theories would suggest using market values, which reflect forwardlooking information available in traded securities prices. We conclude the paper with some general observations on the implications of our results, both for the asset pricing literature, but also for monetary economics. These theories are predicated on the fact that financial intermediaries are in the advantageous position of trading almost all asset classes, anytime and everywhere. Intermediary asset pricing and the financial crisis uchicago voices. Financial intermediation, asset prices, and macroeconomic. In classical approaches to asset pricing, as presented in the wellknown paper by fama 1980. High expectedvolatility thresholds, factor premia, and intermediary asset pricing naresh bansal,a robert a. Connolly,b and chris stiversc a john cook school of business saint louis university b kenanflagler business school university of north carolina at chapel hill.