Dynamic Leverage Asset Pricing - Federal Reserve Bank of New York

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Dynamic Leverage Asset Pricing

Previous title: “Leverage Asset Pricing”

August 2013 Number 625
Revised: December 2014

JEL classification: G10, G12

Authors: Tobias Adrian, Emanuel Moench, and Hyun Song Shin

We empirically investigate predictions from alternative intermediary asset pricing theories. The theories distinguish themselves in their use of intermediary equity or leverage as pricing factors or forecasting variables. We find strong support for a parsimonious dynamic pricing model based on broker-dealer leverage as the return forecasting variable and shocks to broker-dealer leverage as a cross-sectional pricing factor. The model performs well in comparison to other intermediary asset pricing models as well as benchmark pricing models, and extends the cross-sectional results by Adrian, Etula, and Muir (2013) to a dynamic setting.

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46 pages / 573 kb

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