This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Asset Pricing: Implications of Financial Constraints

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, Grand Ballroom A
Hosted By: American Finance Association
  • Chair: Benjamin Hebert, Stanford University

Do Intermediaries Matter for Aggregate Asset Prices?

Valentin Haddad
,
University of California-Los Angeles
Tyler Muir
,
University of California-Los Angeles

Abstract

Existing studies find that intermediary balance sheets are strongly correlated with asset returns, but it is still unclear whether or how much fluctuations in intermediaries’ health matter for aggregate asset prices rather than simply being correlated with aggregate risk aversion. In this paper we propose a model that incorporates both the possibility that intermediaries matter for asset prices as well as the possibility of a frictionless world in which their balance sheets are just correlated to asset returns. We devise a simple test that helps separate the frictionless view of intermediaries and asset prices from the view that they matter. Specifically, a sufficient condition for intermediaries to matter for asset prices is to document a larger elasticity of the risk premia of intermediated assets to changes in intermediary risk appetite. That is, intermediary health should matter relatively more for assets that households are less willing to hold directly. We provide direct empirical evidence that this is the case and hence argue that intermediaries matter for a number of key asset classes including CDS, commodities, sovereign bonds, and FX. Our findings suggest that a large fraction of risk premia in these asset classes is related to intermediary risk appetite.

Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Bruno Biais
,
Toulouse School of Economics
Johan Hombert
,
HEC Paris
Pierre-Olivier Weill
,
University of California-Los Angeles

Abstract

Incentive problems make assets imperfectly pledgeable. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Asset markets are endogenously segmented. There is a basis going always in the same direction, as the price of any risky asset is lower than that of the replicating portfolio of Arrow securities. Equilibrium expected returns are concave in consumption betas, in line with empirical findings. As the dispersion of consumption betas of the risky assets increases, incentive constraints are relaxed and the basis reduced. When hit by adverse shocks, relatively risk tolerant agents sell the safest assets they hold.

Model-Free International Stochastic Discount Factors

Paula Mirela Sandulescu
,
University of Lugano & Swiss Finance Institute
Fabio Trojani
,
University of Geneva and Swiss Finance Institute
Andrea Vedolin
,
Boston University

Abstract

We provide a theoretical characterization of international stochastic discount factors (SDFs)
in incomplete markets under different degrees of market segmentation. Using 40 years of data
on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent
and transitory components. We find that large permanent SDF components help to reconcile
the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. However, under integrated markets, this entails highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries’ risk-bearing capacity and model-free international SDFs.

Self-Fulfilling Asset Prices

Alexander Zentefis
,
Yale University

Abstract

I develop a dynamic asset pricing model with collateral constraints and multiple equilibria. Expectations of the future value of collateral affect leverage and thus investor demand for assets. High collateral value implies high leverage and hence high asset prices, justifying the high value of the collateral. And conversely for low collateral value. As a consequence, asset prices can be self-fulfilling. Price crashes and booms, long price recoveries, price overshooting and misfiring, as well as leverage cycles transpire purely from investor expectations.
Discussant(s)
Dimitri Vayanos
,
London School of Economics
Zhiguo He
,
University of Chicago
Adrien Verdelhan
,
Massachusetts Institute of Technology
Eduardo Davila
,
New York University
JEL Classifications
  • G1 - General Financial Markets