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Do Intermediaries Matter for Aggregate Asset Prices?
Author(s) -
HADDAD VALENTIN,
MUIR TYLER
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13086
Subject(s) - intermediary , predictability , asset (computer security) , capital asset pricing model , financial intermediary , consumption based capital asset pricing model , monetary economics , risk premium , risk aversion (psychology) , economics , business , aggregate (composite) , financial economics , finance , expected utility hypothesis , physics , computer security , quantum mechanics , computer science , materials science , composite material
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.