Intermediary leverage shocks and funding conditions

Jean-Sébastien Fontaine (), René Garcia () and Sermin Gungor ()
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Jean-Sébastien Fontaine: Bank of Canada - Bank of Canada
René Garcia: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UdeM - Université de Montréal
Sermin Gungor: Bank of Canada - Bank of Canada

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Abstract: The aggregate leverage of broker-dealers responds to demand and supply disturbances that have opposite effects on financial markets. Leverage supply shocks that relax broker-dealers' funding constraints raise leverage, improve liquidity, increase returns and carry a positive price of risk. Leverage demand shocks also raise leverage but worsen liquidity, reduce returns and carry a negative price of risk. Disentangling demand-and supply-like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.

Keywords: Asset pricing; Leverage; Broker-dealers (search for similar items in EconPapers)
Date: 2025-02
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Published in Journal of Finance, 2025, 80 (1), pp.57-99. ⟨10.1111/jofi.13407⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05290285

DOI: 10.1111/jofi.13407

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