Intermediary Leverage and the Cross-Section of Expected Returns
41 Pages Posted: 7 Jun 2010 Last revised: 9 Jun 2010
Date Written: May 31, 2010
Abstract
I find that an asset's expected return is largely explained by its covariance with intermediary leverage for a broad cross-section of returns. A one-factor leverage model performs as well as standard multi-factor models on most dimensions and in particular helps explain the 30 Industry and 10 Momentum portfolios. I consider two alternative views of how intermediary leverage is informative for asset prices: (1) the market segmentation view in which intermediaries are the agents relevant for pricing and leverage measures their marginal value of wealth and (2) the reflection of risk premia view in which consumers are the agents relevant for pricing and leverage reflects time-varying risk aversion. I find support for both views.
Keywords: Asset Pricing, Financial Intermediation
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson