Procyclical leverage in Europe and its role in asset pricing

Markus Baltzer, Alexandra Koehl and Stefan Reitz

No 10/2019, Discussion Papers from Deutsche Bundesbank

Abstract: Broker-dealer leverage has recently proven to be strongly procyclical, exhibiting impressive explanatory power for a large cross-section of asset returns in the US. In this paper we add empirical evidence to this finding, showing that European and German broker-dealers actively manage their balance sheets. Moreover, by applying standard Fama-MacBeth regressions as well as dynamic asset pricing models (Adrian, Crump, and Moench, 2015), we confirm the importance of brokerdealer balance-sheet indicators for asset pricing. In particular, leverage shows a procyclical behavior with a positive price of risk. Moreover, high leverage coincides with high asset prices, thereby forecasting lower future returns.

Keywords: broker-dealer leverage; intermediary asset pricing; dynamic asset pricing (search for similar items in EconPapers)
JEL-codes: E31 G21 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cfn and nep-mac
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https://www.econstor.eu/bitstream/10419/194595/1/1662579357.pdf (application/pdf)

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Journal Article: Procyclical leverage in Europe and its role in asset pricing (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:102019

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