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Title:Funding liquidity risk and the cross-section of stock returns PDF Logo
Authors:Adrian, Tobias
Etula, Erkko
Issue Date:2010
Series/Report no.:Staff Report, Federal Reserve Bank of New York 464
Abstract: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.
Subjects:Cross-sectional asset pricing
funding liquidity risk
ICAPM
JEL:G1
G12
G21
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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