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Broker-Dealer Leverage and the Cross-Section of Stock Returns

Author

Listed:
  • Tyler Muir

    (Northwestern University)

  • Erkko Etula

    (Federal Reserve Bank of New York)

  • Tobias Adrian

    (Federal Reserve Bank of New York)

Abstract

We document that average stock returns can be largely explained by their covariance with shocks to the aggregate leverage of security broker-dealers. Our single-factor leverage model compares favorably with standard multi-factor models in the cross-section of size and book-to-market portfolios and outperforms such models when considering momentum, industry, and Treasury bond portfolios. We interpret the risk captured by shocks to broker-dealer leverage as a reflection of unexpected changes in broader economic conditions.

Suggested Citation

  • Tyler Muir & Erkko Etula & Tobias Adrian, 2011. "Broker-Dealer Leverage and the Cross-Section of Stock Returns," 2011 Meeting Papers 1448, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1448
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    References listed on IDEAS

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