Intermediary Asset Pricing

Zhiguo He () and Arvind Krishnamurthy

American Economic Review, 2013, vol. 103, issue 2, 732-70

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)

JEL-codes: E44 G12 G21 G23 G24 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/aer.103.2.732
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Citations: View citations in EconPapers (544)

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Related works:
Working Paper: Intermediary Asset Pricing (2010)
Working Paper: Intermediary Asset Pricing (2008)
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