Working Paper: NBER ID: w29638
Authors: Pablo Ottonello; Wenting Song
Abstract: We provide empirical evidence of the causal effects of changes in financial intermediaries' net worth in the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries' net worth in a narrow window around their earnings announcements, based on U.S. tick-by-tick data. Using these shocks, we estimate that news of a 1-percent decline in intermediaries' net worth leads to a 0.2-0.4 percent decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low.
Keywords: financial intermediaries; macroeconomy; high-frequency identification; financial shocks
JEL Codes: E30; E5; G01; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in financial intermediaries' net worth (G21) | Market value of nonfinancial firms (G32) |
| 1% decline in intermediaries' net worth (G29) | 0.204% decrease in market value of nonfinancial firms (G32) |
| Decline in intermediaries' net worth (G33) | Contraction in supply of funds for nonfinancial firms (E51) |
| Contraction in supply of funds for nonfinancial firms (E51) | Affects investment and market value (G11) |
| Aggregate net worth of intermediaries is low (G29) | Effects more pronounced for firms with high default risk and low liquidity (G33) |
| Effects larger for smaller firms (L25) | Returns of S&P SmallCap 600 and Russell 2000 indices (G12) |