Broker-dealer risk appetite and commodity returns

This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity markets. Commodity derivatives are the principal instrument used by producers and consumers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset-pricing model where producers and consumers of commodities share risk with broker-dealers who are subject to funding constraints. In equilibrium, the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. I estimate the model in the cross-section of commodities and find strong empirical support for its predictions. Fluctuations in risk-bearing capacity have particularly strong forecasting power for energy returns, both in sample and out of sample

Funding liquidity risk and the cross-section of stock returns

We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries' funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies

Risk appetite and exchange rates

We present evidence that the growth of U.S.-dollar-denominated banking sector liabilities forecasts appreciations of the U.S. dollar, both in-sample and out-of-sample, against a large set of foreign currencies. We provide a theoretical foundation for a funding liquidity channel in a global banking model where exchange rates fluctuate as a function of banks' balance sheet capacity. We estimate prices of risk using a cross-sectional asset pricing approach and show that the U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. Our empirical evidence shows that this channel is separate from the more familiar "carry trade" channel. Although the financial crisis of 2007-09 induced a structural shift in our forecasting variables, when we control for this shift, the forecasting relationship is preserved

Global liquidity and exchange rates

We present evidence that the funding liquidity aggregates of U.S. financial intermediaries forecast exchange rate growth-at weekly, monthly, and quarterly horizons, both in-sample and out-of-sample, and for a large set of currencies. We estimate prices of risk using a cross-sectional asset pricing approach and show that U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. We provide a theoretical foundation for a funding liquidity channel in an intertemporal equilibrium pricing model where the 'risk appetite' of dollar-funded intermediaries fluctuates with the tightness of their balance sheet constraints. Our empirical evidence shows that this channel is separate from the more familiar 'carry trade' channel

Financial amplification of foreign exchange risk premia

Theories of systemic risk suggest that financial intermediaries' balance-sheet constraints amplify fundamental shocks. We provide supportive evidence for such theories by decomposing the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediary balance sheets. Relative to the benchmark model with only macroeconomic state variables, balance sheets amplify the U.S. dollar risk premium. We discuss applications to systemic risk monitoring

International Factor Price Equalization in a limited-substitutability technology framework

This paper generalizes the Heckscher-Ohlin trade theory summarized in Samuelson's [Samuelson, P.A., 1949, International Factor Price Equalization Once Again, The Economic Journal 59, 181-197.] calculus treatment to the domain of non-differentiable technologies characterized by discrete alternative Leontief-Sraffa techniques. Demonstrated here is how the close qualitative parallelisms between limited-substitutability technologies and neoclassical marginal-productivity models permit the validity of the theorems of international factor price equalization and their well-known extensions even when smooth marginal productivities cannot obtain.Factor price equalization Limited-substitutability technology Discrete alternative techniques

Funding liquidity risk and the cross-section of stock returns

We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries’ funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies.Capital assets pricing model ; Intermediation (Finance) ; Stocks - Rate of return ; Assets (Accounting) ; Liquidity (Economics)

Risk appetite and exchange rates

We present evidence that the funding liquidity aggregates of U.S. …nancial intermediaries forecast exchange rate growth — at weekly, monthly, and quarterly horizons, both in-sample and out-of-sample, and for a large set of currencies. We estimate prices of risk using a cross-sectional asset pricing approach and show that U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. We provide a theoretical foundation for a funding liquidity channel in an intertemporal equilibrium pricing model where the “risk appetite”of dollar-funded intermediaries ‡uctuates with the tightness of their balance sheet constraints. Our empirical evidence shows that this channel is separate from the more familiar “carry trade”channel