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Intermediary-based equity term structure
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DOI：10.1016/j.jfineco.2024.103856.png)
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Abstract
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We demonstrate that a financial intermediary-based asset pricing model offers a compelling explanation for a new set of conditional moments of equity term structure and convenience yields. The model's key mechanism is that the time-varying tightness of intermediaries' leverage constraints drives significant mean reversion in the price of risk. This model guides us in devising a novel empirical methodology to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.
Keywords:
Equity term structure
Financial intermediary
Mean reversion
Relative tightness index
Discount rate
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