The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Financial Intermediaries and the Cross‐Section of Asset Returns
Published: 07/03/2014 | DOI: 10.1111/jofi.12189
TOBIAS ADRIAN, ERKKO ETULA, TYLER MUIR
Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker‐dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and high marginal value of wealth. Our single‐factor model prices size, book‐to‐market, momentum, and bond portfolios with an R2 of 77% and an average annual pricing error of 1%—performing as well as standard multifactor benchmarks designed to price these assets.