Using the url or doi link below will ensure access to this page indefinitely. We model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. 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. We find that shocks to the equity capital ratio of financial intermediariesprimary dealer. This paper assesses the extent to which intermediary capital ic risk contributes toward explaining commodity futures returns. In this paper, we combine these two ideas, and provide a direct test of whether the.
The price of risk for intermediary capital shocks is consistently positive. Intermediary asset pricing and the financial crisis uchicago voices. When the constraint binds, so that intermediaries equity capital is scarce, risk premia rise to reflect the capital scarcity. Asset pricing, corporate finance, monetary economics intermediary asset pricing understands asset prices and risk premia through the lens of frictions in financial intermediation.
Literature on intermediary asset pricing, the net worth models he and krishnamurthy 20. 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. Intermediarysic code 6 finance, insurance, real estate. Intermediary managers wealth constrains size of intermediarys overall equity, for moral hazard reasons. We provide answers to these questions in section 2, which builds a simple intermediary asset pricing model. Intermediary asset pricing, nber working papers 14517, national bureau of economic research, inc. Zhiguo he and byran kelly gratefully acknowledge financial.
The editor of the journal of financial economics highlighted article from the latest published issue of the journal intermediary asset pricing. 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. Investing in risky assets is so hard that most is done via intermediaries and someone has to manage the intermediaries. He s research focuses on the implications of agency frictions and debt maturities in financial markets and macroeconomics, especially related to contract theory and banking. Capital asset pricing with a stochastic horizon volume 55 issue 3 michael j. Valentin haddad and tyler muir november 3, 2017 abstract we propose a simple framework for intermediary asset pricing. New evidence from many asset classes, journal of financial economics, vol. Jan 30, 2020 this paper assesses the extent to which intermediary capital ic risk contributes toward explaining commodity futures returns. Financial intermediaries and the crosssection of asset returns. By zhiguo he, arvind krishnamurthy and loewenstein pablo kurlat. Intermediary asset pricing zhiguo he and arvind krishnamurthy nber working paper no. He is also a research associate at the national bureau of economic research, faculty codirector of the famamiller center, member of the academy committee at the luohan academy, and specialterm alibaba.
In this paper we propose a model that incorporates both the possibility that intermediaries matter for asset. His mostcited paper intermediary asset pricing, coauthored with arvind krishnamurthy, presents a model explaining financial crises in markets with complex. This article explains the theory behind intermediary asset pricing and, in particular, how it is different from other. Discussion of do intermediaries matter for aggregate asset. Capital asset pricing with a stochastic horizon journal. Intermediary asset pricing zhiguo he arvind krishnamurthy. 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. As in he and krishnamurthy 2012, the delegation contract is constrained by a moral hazard problem, which gives. Next we show that the second condition required for intermediaries to. Louis, mo 63, usa abstract we nd that shocks to the equity capital. Intermediary asset pricing and the financial crisis.
Financial intermediaries are assumed to possess greater information processing capacity. We present a model to study the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. New evidence from many asset classes zhiguo he, bryan kelly, and asaf manela nber working paper no. Intermediary asset pricing simon fraser university. Our second choice is guided by the recent intermediary asset pricing models ofhe and krishnamurthy20,2012 andbrunnermeier and sannikov2014, which follow the tradition of bernankeandgertler1989andholmstromandtirole1997.
The editor of the journal of financial economics highlighted article from the latest published issue of the journal. We model the dynamics of risk premia during crises in asset markets where the. Louis, mo 63, usa abstract we nd that shocks to the equity. Literature on intermediary asset pricing, the net worth models he and. Risk premia rise when the constraint binds, reflecting the capital scarcity. Intermediaries face a constraint on raising equity capital. Intermediary asset pricing and the financial crisis annual. Zhiguo he is a chinese financial economist serving as the fuji bank and heller professor of finance at the university of chicago booth school of business, where he has taught since 2008. Intermediary asset pricing and the financial crisis zhiguo he, arvind krishnamurthy. 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. May 11, 2017 most forms of the capital asset pricing model assume that price differences can be effortlessly arbitraged away. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastestgrowing areas of research in finance. Intermediary asset pricing becker friedman institute university of.
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. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastest growing areas of research in finance. Intermediary asset pricing, 2010 meeting papers 27, society for economic dynamics. We would like to show you a description here but the site wont allow us. Capital asset pricing with a stochastic horizon journal of. Intermediary asset pricing by zhiguo he and arvind krishnamurthy. He and krishnamurthy 20 presents a canonical intermediary asset pricing model, showing theoretically and quantitatively under what assumptions the capitalization of nancial intermediaries is. The capital asset pricing model capm is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. So what is the content of intermediary asset pricing, and does intermediary asset pricing refute traditional consumptionbased asset pricing. In this paper we present empirical tests of an extended version of the capital asset pricing model capm that replaces the singleperiod horizon with a probability distribution over different horizons. Two elements shape if and how intermediaries matter for asset prices.
The calibrated model matches the nonlinearity of risk premia during crises and the speed of reversion in risk premia from a crisis. In such frameworks, the leverage of nancial intermediaries measures the tightness of intermediary funding constraints and. The capital asset pricing model capm is a model that describes the relationship between systematic risk and. Theory of intermediary asset pricing w agg e ects e. G01,g12,g21,g24 abstract we find that shocks to the equity capital ratio of financial intermediariesprimary dealer counterparties. Intermediary asset pricing in commodity futures returns. Some of these models build in a role for intermediaries as well as consumers. 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. 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. Financial intermediation, asset prices, and macroeconomic. 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. Chicago booth asset pricing conference 2015, dukeunc asset pricing conference 2016, idc conference in financial economics 2016 and wfa 2016 for helpful comments. Intermediaries face a constraint on raising equity.
Most forms of the capital asset pricing model assume that price differences can be effortlessly arbitraged away. Meanwhile, the intermediary asset pricing literature has argued that constraints on intermediaries have important implications for the pricing of assets see heandkrishnamurthy2017forasurvey. Our paper belongs to a burgeoning literature on intermediary asset pricing, which highlights the pricing kernel of. Intermediary balance sheets meet the berkeleyhaas faculty. Intermediary asset pricing and the financial crisis nber. February 27, 2012 abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a. Do intermediaries matter for aggregate asset prices. 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. Intermediary asset pricing american economic association. Households purchase this capacity, and then delegate their investment decisions to intermediaries.
Intermediary asset pricing in commodity futures returns yin. Intermediary balance sheets tobias adrian and nina. Pdf do intermediaries matter for aggregate asset prices. Intermediation, capital immobility, and asset prices. We model the dynamics of risk premia during crises in asset mar kets where the.
Financial intermediaries and the crosssection of asset. Intermediary asset pricing is a branch of heterogeneous agent ap in heterogenous agent models e. Intermediary asset pricing understands asset prices and risk premia through the lens of frictions in financial intermediation. Krishnamurthy 20 investing in risky assets is so hard that most is done via. Accepted manuscript accepted manuscript intermediary asset pricing. 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. Intermediarybased asset pricing and the crosssections of. Pdf intermediation, capital immobility, and asset prices.
Valentin haddad and tyler muir october 1, 2017 abstract we propose a simple framework for intermediary asset pricing. The role of intermediaries in asset pricing chicago. Intermediary asset pricing and the financial crisis zhiguohe arvindkrishnamurthy. We find that the ic effect is substantially positive and continues to grow as the financialization of commodities deepens.
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