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Intermediary Asset Pricing

Arvind Krishnamurhty and Zhiguo He ()
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Arvind Krishnamurhty: Northwestern University

No 1327, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: We study the dynamics of risk premia during crises where financial intermediaries faces constraints on raising equity capital. Risk premia rise when intermediaries' equity capital is scarce. We calibrate the model to match two aspects of crises: the nonlinearity of risk premia during crisis episodes, and the speed of adjustment in risk premia from a crisis back to pre-crisis levels. We quantitatively evaluate the effectiveness of several central bank policies. Infusing equity capital into intermediaries is particularly effective because it attacks the capital constraint that is at the root of the crisis in our model.

Date: 2010
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Journal Article: Intermediary Asset Pricing (2013) Downloads
Working Paper: Intermediary Asset Pricing (2008) Downloads
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