Intermediary Asset Pricing and Betting Against Beta

Abstract

From the intuition that the financial intermediaries are the agents most representative of the investors that actually interact on the financial markets and determine the assets’ prices, intermediary asset pricing theories build pricing kernels mainly based on intermediaries’ funding tightness. At the same time, this is also hypothesized to be key in rationalizing one of the most celebrated pricing anomalies, the CAPM-beta low risk anomaly. The same anomaly is also hypothesized to depend on the different coskewness mechanically brought by assets with different market betas, which is appreciated by the traders, but by the canonical models. Interestingly, because of the asymmetrical effects of the funding tightness, intermediary asset pricing theories predict their risk factors to be related to both. This thesis, after a few preparatory tests of the potential intermediary risk factors informativeness of the intermediary SDF, tests whether the consistency showed by the intermediary factor models on a multitude of assets in previous studies is extendible to the troubling LRA, which are theoretically well connected, and should therefore be explained by it.