Standard factor pricing models do not capture well the common time-series or cross-sectional variation in average returns of financial stocks. We propose a five-factor asset pricing model that complements the standard Fama and French (1993) three-factor model with a financial sector ROE factor...

Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between arbitrage and inference: they would like to buy assets in response to temporary price declines (the...

This paper explores financial stability policies for the shadow banking system. I tie policy options to economic mechanisms for shadow banking that have been documented in the literature. I then illustrate the role of shadow bank policies using three examples: agency mortgage real estate...

A 2012 paper by Goodhart, Kashyap, Tsomocos, and Vardoulakis (GKTV) proposes a dynamic general equilibrium framework that provides a conceptual - and to some extent quantitative - framework for the analysis of macroprudential policies. The distinguishing feature of GKTV's paper relative to any...

One year after passage of the Dodd-Frank Act (DFA), regulators proposed several of the rules required for its implementation. In this paper, I discuss some aspects of proposed DFA rules in light of shadow banking. The topics are risk-retention rules for securitized products and the impact of...

Pierret (2015) presents empirical analysis of the solvency-liquidity nexus for the banking system, documenting that a shock to the level of banks' solvency risk is followed by lower short-term debt. Conversely, higher short-term debt Granger-causes higher solvency risk. These results point...

"When risk-factor loadings are time-varying and unobservable, investors are forced to form beliefs about the levels of their loadings. The learning process involved in forming these beliefs has normative implications for asset-pricing tests. This paper develops an equilibrium model of learning...

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...

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...

The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation in the United States profoundly. Within the market-based financial system, “shadow banks” are particularly important institutions. Shadow banks are financial...