Intermediary-based equity term structure

Kai Li and Chenjie Xu

Journal of Financial Economics, 2024, vol. 157, issue C

Abstract: We demonstrate that a financial intermediary-based asset pricing model offers a compelling explanation for a new set of conditional moments of equity term structure and convenience yields. The model’s key mechanism is that the time-varying tightness of intermediaries’ leverage constraints drives significant mean reversion in the price of risk. This model guides us in devising a novel empirical methodology to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.

Keywords: Equity term structure; Financial intermediary; Mean reversion; Relative tightness index; Discount rate (search for similar items in EconPapers)
JEL-codes: E2 E3 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:157:y:2024:i:c:s0304405x24000795

DOI: 10.1016/j.jfineco.2024.103856

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