Working Paper: NBER ID: w28692
Authors: Valentin Haddad; Tyler Muir
Abstract: Poor financial health of intermediaries coincides with low asset prices and high risk premiums. Is this because intermediaries matter for asset prices, or simply because their health correlates with economy-wide risk aversion? In the first case, return predictability should be more pronounced for asset classes in which households are less active. We provide evidence supporting this prediction, suggesting that a quantitatively sizable fraction of risk premium variation in several large asset classes such as credit or MBS is due to intermediaries. Movements in economy-wide risk aversion create the opposite pattern, and we find this channel also matters.
Keywords: intermediaries; asset prices; risk premiums
JEL Codes: G00; G01; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intermediary health (I14) | asset prices (G19) |
| intermediary health (I14) | risk premiums (G19) |
| intermediary risk appetite (D81) | risk premiums (G19) |
| household risk aversion (D11) | risk premiums (G19) |
| intermediary movements (F20) | risk premium variation (G19) |