Broker-Dealer Leverage and the Cross-Section of Stock Returns

Tyler Muir, Erkko Etula and Tobias Adrian
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Tyler Muir: Northwestern University

No 1448, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1448

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