Poor financial health of intermediaries coincides with low asset prices and high risk premiums. Is this because intermediaries matter for asset prices, or because their health correlates with economy‐wide risk aversion? In the first case, return predictability should be more pronounced for asset classes in which households are less active. We provide evidence supporting this prediction, suggesting that a quantitatively sizable fraction of risk premium variation in several large asset classes such as credit or mortgage‐backed securities (MBS) is due to intermediaries. Movements in economy‐wide risk aversion create the opposite pattern, and we find this channel also matters.

Banks' balance sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations that support this view, but also discuss several challenges to this interpretation.

We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. Investment-grade corporate bonds traded at a discount to credit default swaps; exchange-traded funds traded at a discount to net asset value, more so for safer bonds. The Federal Reserve’s announcement of corporate bond purchases caused these dislocations to disappear and prices to recover. These facts inform potential theories of the disruption. The best explanation is an acute liquidity need for specific bond investors, such as mutual funds, leading them to liquidate large positions.

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit‐specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.