Intermediary Leverage Shocks and Funding Conditions

56 Pages Posted: 11 Aug 2020 Last revised: 6 Jan 2021

See all articles by Jean-Sebastien Fontaine

Jean-Sebastien Fontaine

Bank of Canada

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Sermin Gungor

University of Western Ontario

Date Written: July 11, 2020

Abstract

The leverage of financial broker-dealers responds to demand- and supply-like shocks. Supply shocks relax their funding constraint and raise leverage, while demand shocks also raise leverage but tighten the constraint. The shocks play opposite roles in financial markets. Leverage supply shocks improve liquidity and carry a positive price of risk, while leverage demand shocks worsen liquidity and carry a negative price of risk. Because of this difference in signs, disentangling the two types of shocks strengthens the evidence for intermediation frictions in asset pricing, resolves some of the existing puzzles, and can help understand the different mechanisms driving broker-dealer leverage.

Keywords: Broker-dealers, Leverage, Asset pricing

JEL Classification: E43, H42

Suggested Citation

Fontaine, Jean-Sebastien and Garcia, René and Gungor, Sermin, Intermediary Leverage Shocks and Funding Conditions (July 11, 2020). Available at SSRN: https://ssrn.com/abstract=3649065 or http://dx.doi.org/10.2139/ssrn.3649065

Jean-Sebastien Fontaine (Contact Author)

Bank of Canada ( email )

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Canada

HOME PAGE: http://www.jean-sebastienfontaine.com

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

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Montreal, Quebec H3C 3J7
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University of Montreal ( email )

United States

Sermin Gungor

University of Western Ontario ( email )

Social Science Center
Social Science Center, Room 4056
London, Ottawa N6A 5C2
Canada

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