Article

Intermediary Leverage Shocks and Funding Conditions

Jean-Sébastien Fontaine, René Garcia, and Sermin Gungor

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, vol. 80, n. 1, February 2025, pp. 57–99.

Published in

The Journal of Finance, vol. 80, n. 1, February 2025, pp. 57–99