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Intermediary Leverage Shocks and Funding Conditions

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  • JEAN‐SÉBASTIEN FONTAINE
  • RENÉ GARCIA
  • SERMIN GUNGOR

Abstract

The aggregate leverage of broker‐dealers responds to demand and supply disturbances that have opposite effects on financial markets. Specifically, leverage supply shocks that relax broker‐dealers' funding constraints increase leverage, liquidity, and returns and carry a positive price of risk, while leverage demand shocks also increase leverage but reduce liquidity and returns and carry a negative price of risk. Disentangling demand‐ and supply‐like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.

Suggested Citation

  • Jean‐Sébastien Fontaine & René Garcia & Sermin Gungor, 2025. "Intermediary Leverage Shocks and Funding Conditions," Journal of Finance, American Finance Association, vol. 80(1), pages 57-99, February.
    • Handle: RePEc:bla:jfinan:v:80:y:2025:i:1:p:57-99
    DOI: 10.1111/jofi.13407
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