Intermediaries and Asset Prices

Intermediary asset pricing posits that financial institutions are important players in financial markets, and that their decisions shape asset prices beyond simply reflecting the preferences of the average household in the economy. We explain how the intermediary-asset pricing approach helps make sense of empirical patterns in the data: the excess volatility of asset prices, differences in price movements across asset classes, the cross section of expected returns within asset classes, and specific arbitrages and price dislocations. We also review how this view of price fluctuations has important implications for macroeconomic dynamics, international economics, and policy. In particular, the role of financial regulation and monetary policy in alleviating constraints or removing risk from intermediary balance sheets during periods of stress is central in this approach. We highlight both existing progress and gaps for future research.