Authors: Tobias Adrian, Erkko Etula, and Tyler Muir

Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker-dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and a high marginal value of wealth. Our single-factor model prices size, book-to-market, momentum, and bond portfolios with an R² of 77 percent and an average annual pricing error of 1 percent—performing as well as standard multifactor benchmarks designed to price these assets.