10.17889/E109689V1
Krishnamurthy, Arvind
He, Zhiguo
Replication data for: Intermediary Asset Pricing
ICPSR Inter-university Consortium for Political and Social Research
2012
10.1257/aer.103.2.732
10.1257/aer.103.2.732
1
We model the dynamics of risk premia during crises in asset markets
where the marginal investor is a financial intermediary. Intermediaries face an equity capital constraint. Risk premia rise
when the constraint binds, reflecting the capital scarcity. The calibrated model matches the nonlinearity of risk premia during crises
and the speed of reversion in risk premia from a crisis back to precrisis
levels. We evaluate the effect of three government policies: reducing intermediaries borrowing costs, injecting equity capital, and purchasing distressed assets. Injecting equity capital is particularly
effective because it alleviates the equity capital constraint that
drives the model's crisis. (JEL E44, G12, G21, G23, G24)