 Option-based intermediary leverageThomas Gruenthaler, Friedrich Lorenz and Paul Meyerhof Journal of Banking & Finance, 2022, vol. 145, issue C Abstract: We introduce a new proxy for the health of financial intermediaries-the Leverage Bearing Capacity (LBC). LBC is the leverage of a fictitious intermediary that targets a fixed level of risk and rebalances its capital structure on an ongoing basis. Our measure is based on market values, incorporates off-balance sheet activities, is available at any frequency, and inherently captures higher-order risks. We analyze the dynamics of LBC in event studies and demonstrate that it is closely linked to financial sector uncertainty. Building on an intermediary asset pricing model, we validate that LBC proxies the marginal wealth of intermediaries. Empirically, it explains the expected returns across several asset classes and subsumes the explanatory power of existing measures of intermediaries’ health, financial uncertainty, higher-order risks, and common risk factors. Keywords: Intermediary asset pricing; Financial intermediation; Option-implied information; Leverage; Financial constraints; Risk-bearing capacity; Balance sheet valuation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:145:y:2022:i:c:s0378426622002503 DOI: 10.1016/j.jbankfin.2022.106670 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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