Fontaine, Jean-SébastienORCID: https://orcid.org/0000-0001-9346-4645, Garcia, René and Gungor, Sermin (2025) Intermediary leverage shocks and funding conditions. Journal of Finance, Vol. 80 (N° 1). pp. 57-99.

Abstract

The aggregate leverage of broker-dealers responds to demand and supply disturbances that have opposite effects on financial markets. Leverage supply shocks that relax broker-dealers' funding constraints raise leverage, improve liquidity, increase returns and carry a positive price of risk. Leverage demand shocks also raise leverage but worsen liquidity, reduce returns and carry a negative price of risk. Disentangling demand-and supply-like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.