Broker-Dealer Leverage and the Cross-Section of Stock Returns
Erkko Etula and
Tobias Adrian ()
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Tyler Muir: Northwestern University
No 1448, 2011 Meeting Papers from Society for Economic Dynamics
We document that average stock returns can be largely explained by their covariance with shocks to the aggregate leverage of security broker-dealers. Our single-factor leverage model compares favorably with standard multi-factor models in the cross-section of size and book-to-market portfolios and outperforms such models when considering momentum, industry, and Treasury bond portfolios. We interpret the risk captured by shocks to broker-dealer leverage as a reflection of unexpected changes in broader economic conditions.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1448
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