American Economic Review: Vol. 103 No. 2 (April 2013)


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Intermediary Asset Pricing

Article Citation

He, Zhiguo, and Arvind Krishnamurthy. 2013. "Intermediary Asset Pricing." American Economic Review, 103(2): 732-70.

DOI: 10.1257/aer.103.2.732


We model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary. Intermediaries face an equity capital constraint. Risk premia rise when the constraint binds, reflecting the capital scarcity. The calibrated model matches the nonlinearity of risk premia during crises and the speed of reversion in risk premia from a crisis back to precrisis levels. We evaluate the effect of three government policies: reducing intermediaries borrowing costs, injecting equity capital, and purchasing distressed assets. Injecting equity capital is particularly effective because it alleviates the equity capital constraint that drives the model's crisis. (JEL E44, G12, G21, G23, G24)

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He, Zhiguo (U Chicago)
Krishnamurthy, Arvind (Northwestern U)

JEL Classifications

E44: Financial Markets and the Macroeconomy
G12: Asset Pricing; Trading volume; Bond Interest Rates
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G23: Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies

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