A11: Investment Managers and Intermediary Asset Pricing

We study the role of investment managers for intermediary asset pricing. Current research on the role of intermediaries for asset prices focuses on banks and broker/dealer firms. However, investment managers are a major intermediary class with an investment volume of 89 trn USD in 2019. At the same time, direct ownership of assets through households is in decline, since investment managers offer investment benefits such as diversification, security selection, investment timing, and access to certain asset classes and sophisticated trading strategies. But even though investment managers mainly invest funds on behalf of their clients, frictions and constraints cause them to deviate from their clients’ preferences. Hence, investment manager frictions may offer an explanation for the strongly fluctuating prices and risk premia of intermediated assets, including stocks, bonds, and derivatives. In this project, we consider three types of frictions: equity capital, leverage, and liquidity constraints. Prior empirical research has shown that all three frictions affect investment managers: For example, time-varying equity capital constraints arise via flows, mergers and acquisitions among investment managers, or innovations such as exchange traded funds (ETFs). Leverage constraints arise via short-selling and options usage restrictions as well as through shocks to direct lending. Last, liquidity constraints arise, for example, via restrictions in securities lending or shocks to cash-like assets such as sovereign bonds which investment managers hold due to liquidity motives. Our contribution in this project is to analyze the impact of these three types of frictions on asset prices and risk premia. To address the challenge that shocks to the frictions at the investment manager level are likely to be correlated with shocks to other investors, we will use variation in the degree of intermediation through investment managers at the individual asset level (instead of the asset class level). Thus, the project achieves two purposes: First, it provides evidence on the importance of investment managers as a specific intermediary class for the prices of individual assets. Second, it explores constraints that affect investment managers and are therefore key for asset prices.

Project Leader: Prof. Dr. Monika Gehde-Trapp