DP11466 Dynamic Leverage Asset Pricing

Author(s): Tobias Adrian, Emanuel Moench, Hyun Song Shin
Publication Date: August 2016
Keyword(s): intermediary asset pricing, Leverage Cycles, Macro-Finance
JEL(s): G10, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11466

We empirically investigate predictions from alternative intermediary asset pricing theories. The theories distinguish themselves in their use of intermediary equity or leverage as pricing factors or forecasting variables. We find strong support for a parsimonious dynamic pricing model based on broker-dealer leverage as the return forecasting variable and shocks to broker-dealer leverage as a cross-sectional pricing factor. The model performs well in comparison to other intermediary asset pricing models as well as benchmark pricing models in linear and nonlinear specifications. We find little empirical support for pricing models using intermediary equity as state variable.