Abstract
The aggregate leverage of broker-dealers responds to demand and supply disturbances that have opposite effects on financial markets. Leverage supply shocks that relax broker-dealers' funding constraints raise leverage, improve liquidity, increase returns and carry a positive price of risk. Leverage demand shocks also raise leverage but worsen liquidity, reduce returns and carry a negative price of risk. Disentangling demand-and supply-like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.
Keywords
Broker-dealers; Leverage; Asset pricing;
JEL codes
- H42: Publicly Provided Private Goods
Reference
Jean-Sébastien Fontaine, René Garcia, and Sermin Gungor, “Intermediary Leverage Shocks and Funding Conditions”, The Journal of Finance, 2025, forthcoming.
Published in
The Journal of Finance, 2025, forthcoming