Intermediation Frictions in Equity Markets

Abstract

Stocks with similar characteristics but different levels of ownership by financial institutions have returns and risk premia that comove very differently with shocks to the risk-bearing capacity of financial intermediaries. After accounting for observable stock characteristics, excess returns on more intermediated stocks have higher betas on contemporaneous shocks to intermediary willingness to take risk and are more predictable by state variables that proxy for intermediary health. The empirical evidence supports the predictions of asset pricing models featuring financial intermediaries as marginal investors who face frictions that induce changes in their risk-bearing capacity. This suggests that such models are useful for explaining price movements not only in markets for complex financial assets, but also within asset classes where households face comparatively low barriers to direct participation.

Bryan Seegmiller
Bryan Seegmiller
Assistant Professor of Finance

I’m currently an assistant professor and Donald P. Jacobs Scholar in the finance department at the Kellogg School of Management at Northwestern University. I received my PhD from the MIT Sloan School of Management in May 2022.

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