Financial Intermediaries and Asset Prices
Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM
- Chair: Tyler Muir, Yale University
An Equilibrium Model of Institutional Demand and Asset Prices
AbstractWe develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings. The equilibrium price vector is uniquely determined by market clearing across institutional investors and households. We relate the model to Euler equations, mean-variance portfolio choice, factor models, and cross-sectional regressions on characteristics. We propose an instrumental variables estimator for the asset demand system to address the endogeneity of institutional demand and asset prices. Using U.S. stock market data, we illustrate how our approach could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Intermediary Asset Pricing: New Evidence From Many Asset Classes
AbstractWe find that shocks to the equity capital ratio of financial intermediaries—Primary Dealer counterparties of the New York Federal Reserve—possess significant explanatory power for cross-sectional variation in expected returns. This is true not only for commonly studied equity and government bond market portfolios, but also for other more sophisticated asset classes such as corporate and sovereign bonds, derivatives, commodities, and currencies. Our intermediary capital risk factor is strongly pro-cyclical, implying counter-cyclical intermediary leverage. The price of risk for intermediary capital shocks is consistently positive and of similar magnitude when estimated separately for individual asset classes, suggesting that financial intermediaries are marginal investors in many markets and hence key to understanding asset prices.
The Banking View of Bond Risk Premia
AbstractBanks’ exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with a bank-centric view of the market for interest rate risk. Banks’ activities — accepting deposits and making loans — naturally exposes their balance sheets to changes in interest rates. In equilibrium, the bond risk premium compensates banks for bearing these fluctuations: for instance, when consumers demand for fixed rate mortgages increases, banks have to scale up their exposure to interest rate risk and are compensated by an increase in bond risk premium. A key insight is that the net exposure of banks, rather than quantities of particular types of loans or deposits, reveals the risk premium.
- G1 - Asset Markets and Pricing