DP11466 Dynamic Leverage Asset Pricing

Author(s): Tobias Adrian, Emanuel Moench, Hyun Song Shin
Publication Date: August 2016
Date Revised: November 2019
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 the predictions from alternative intermediary asset pricing theories. Exposure to broker-dealer book leverage commands a positive price of risk while high levels of broker-dealer leverage are associated with low future returns. In contrast, exposure to broker-dealer book equity relative to total wealth earns a negative price of risk and high broker-dealer equity predicts higher future returns. Measures of intermediary market equity yield opposite signs but are not robust to the inclusion of common risk factors. We conclude that there is strong support for models with leverage constraints as opposed to net worth constraints as the relevant friction.