Asset returns and financial intermediary leverage : an emprical analysis

Abstract

In this paper the result of Adrian, Etula, and Muir (2014) is reexamined. They propose a model with nancial intermediary leverage that is able to price a set of portfolios remarkably well. In this paper the model is estimated with di erent portfolios as test assets. This is done to account for recent critiques of the use of size and book-to-market sorted portfolios as test assets. This paper uses two new sets of portfolios, industry portfolios and portfolios sorted on size and pre-formation leverage beta. The proposed model with nancial intermediaries is not able to explain the variation of cross-sectional average returns on the two new sets of portfolios.