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Intermediary-based equity term structure

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  • Li, Kai
  • Xu, Chenjie

Abstract

We demonstrate that a financial intermediary-based asset pricing model offers a compelling explanation for a new set of conditional moments of equity term structure and convenience yields. The model’s key mechanism is that the time-varying tightness of intermediaries’ leverage constraints drives significant mean reversion in the price of risk. This model guides us in devising a novel empirical methodology to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.

Suggested Citation

  • Li, Kai & Xu, Chenjie, 2024. "Intermediary-based equity term structure," Journal of Financial Economics, Elsevier, vol. 157(C).
  • Handle: RePEc:eee:jfinec:v:157:y:2024:i:c:s0304405x24000795
    DOI: 10.1016/j.jfineco.2024.103856
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    More about this item

    Keywords

    Equity term structure; Financial intermediary; Mean reversion; Relative tightness index; Discount rate;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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