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American Economic Review Vol. 103 No. 2 2013

Intermediary Asset Pricing

Zhiguo He1; Arvind Krishnamurthy2

1 Booth School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637, and NBER. · 2 Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, and NBER.

Abstract

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.

DOI
10.1257/aer.103.2.732
Volume
103
Issue
2
Pages
732-770
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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