Shin, Sang-Ook (2019-06). Essays on Intermediary Asset Pricing. Doctoral Dissertation. Thesis uri icon

abstract

  • The dissertation studies intermediary asset pricing, including two chapters. The first chapter examines how heterogeneity in intermediary capital - the equity capital ratio of the largest financial intermediaries in the U.S. - affects the cross-section of stock returns. I estimate the exposure (i.e., beta) of individual stocks to a shock in the dispersion of intermediary capital and find that stocks in the lowest beta decile generate an additional 6.8% - 8.2% annual return relative to stocks in the highest beta decile. Using data from Institutional (13F) Holdings, I also find evidence that low-capital intermediaries, who hold riskier assets than high-capital intermediaries, face leverage-induced fire sales during bad times. I propose a model of heterogeneous intermediary capital in which heterogeneous risk preference between high- and low-capital intermediaries leads to a countercyclical variation in aggregate risk aversion and a risk premium. The model states that the dispersion of intermediary capital is priced in the cross-section of asset prices, which supports the empirical findings. The second chapter focuses on how bank capital affects bank stock performance. We show that capital does not affect returns unconditionally, but high-capital banks have higher risk-adjusted stock returns (alphas) than low-capital banks in bad times in and out of sample. Trading strategies earn 3.60% - 4.44% annually. The results are robust to: using different bad times and capital definitions, alternative asset pricing models, and ex-ante expected returns; controlling for performance-type delistings, short-sale constraints, and trading costs; and dropping the largest or smallest banks. Our results seem to be driven by a "Surprised Investor Channel" rather than by an "Informed Investor Channel."

publication date

  • August 2019
  • August 2019