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 suggests that asset pricing models featuring financial intermediaries as marginal investors and frictions that induce changes in intermediary risk bearing capacity are useful in explaining price movements even in asset classes with comparatively low barriers to household participation.