Intermediary Asset Pricing
Zhiguo He, Arvind Krishnamurthy
American Economic Review · 2013 · Volume 103 · Issue 2
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. (JEL E44, G12, G21, G23, G24)
Keywords
Financial Markets and the Macroeconomy, Asset Pricing, Trading volume, Bond Interest Rates, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Pension Funds, Non-bank Financial Institutions, Financial Instruments, Institutional Investors, Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies
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