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Intermediary Asset Pricing

Author

Listed:
  • Arvind Krishnamurhty

    (Northwestern University)

  • Zhiguo He

    (University of Chicago)

Abstract

We study the dynamics of risk premia during crises where financial intermediaries faces constraints on raising equity capital. Risk premia rise when intermediaries' equity capital is scarce. We calibrate the model to match two aspects of crises: the nonlinearity of risk premia during crisis episodes, and the speed of adjustment in risk premia from a crisis back to pre-crisis levels. We quantitatively evaluate the effectiveness of several central bank policies. Infusing equity capital into intermediaries is particularly effective because it attacks the capital constraint that is at the root of the crisis in our model.

Suggested Citation

  • Arvind Krishnamurhty & Zhiguo He, 2010. "Intermediary Asset Pricing," 2010 Meeting Papers 1327, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1327
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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