Finance

Physics

Business

Capital asset pricing model

Aggregate (composite)

Financial economics

Risk aversion (psychology)

Risk premium

Intermediary

Composite material

Predictability

Economics

Consumption-based capital asset pricing model

Materials science

Expected utility hypothesis

Computer science

Monetary economics

Quantum mechanics

Computer security

Financial intermediary

Asset (computer security)

The Journal of Finance

ABSTRACT Poor financial health of intermediaries coincides with low asset prices and high risk premiums. Is this because intermediaries matter for asset prices, or because their health correlates with economy‐wide risk aversion? In the first case, return predictability should be more pronounced for asset classes in which households are less active. We provide evidence supporting this prediction, suggesting that a quantitatively sizable fraction of risk premium variation in several large asset classes such as credit or mortgage‐backed securities (MBS) is due to intermediaries. Movements in economy‐wide risk aversion create the opposite pattern, and we find this channel also matters.

Do Intermediaries Matter for Aggregate Asset Prices?