Intermediary asset pricing: New evidence from many asset classes

Abstract

Pricing Conference 2015 for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Funding Liquidity Risk and the Cross-section of MBS Returns

“…These results echo findings of the recent literature on the intermediary-based asset pricing, suggesting that exposures to shocks to dealers' capital and leverage are priced in the cross-section of asset returns (e.g. see He and Krishnamurthy (2013) and Brunnermeier and Sannikov (2014) for theoretical insights and Adrian and Muir (2014) and He, Kelly, and Manela (2015) for empirical investigations). One way to interpret such shocks is as tightening or easing of balance-sheet constraints, with the balance-sheet thresholds being imposed by regulatory guidelines or internal risk management and business practices and, thus, affecting the dealers' risk bearing capacity and willingness to hold securities.…”

Basis‐Momentum

“…The link to volatility and liquidity suggests an important role for financial intermediaries in explaining the basis‐momentum effect. Adrian, Etula, and Muir () and He, Kelly, and Manela () find that intermediary risk factors are priced in many asset classes. Following He, Kelly, and Manela (), we analyze whether exposure to the value‐weighted equity return of financial intermediaries (i.e., Primary Dealer counterparties of the New York Federal Reserve) is priced .…”

“…() show that volatility risk is priced in a cross section of basis portfolios. He, Kelly, and Manela () show that financial intermediary risk is priced in a cross section of individual commodities in a relatively short sample over 2002 to 2012.…”

Deviations from Covered Interest Rate Parity

“…To the best of our knowledge, however, no model introduced so far can replicate our four main facts on CIP deviations. On the empirical side, Adrian, Etula, and Muir () and He, Kelly, and Manela () show that shocks to the equity capital ratio of financial intermediaries account for a large share of the cross‐sectional variation in expected returns in different asset classes. Siriwardane () shows that limited investment capital impacts pricing in the credit default swap (CDS) market.…”