Funding liquidity risk and the cross-section of stock returns

Tobias Adrian and Erkko Etula

No 464, Staff Reports from Federal Reserve Bank of New York

Abstract: We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries? funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies.

Keywords: capital asset pricing model; Intermediation (Finance); Stocks - Rate of return; Assets (Accounting); Liquidity (Economics) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-bec and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr464.html (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr464.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:464

Ordering information: This working paper can be ordered from
pipubs@ny.frb.org

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli (gabriella.bucciarelli@ny.frb.org).