B02: Econometric Analysis of Intermediary Asset Pricing Models: Advancement of Methodologies and Resolution of Empirical Issues
A growing literature is concerned with the role of financial intermediaries for the pricing of assets (intermediary asset pricing, IAP), which provides the leitmotif for this research unit (RU). Being financial economists with a strong econometric background, we have identified some methodological gaps in the IAP literature, which motivate our econometrics-focused research project. In particular, the theoretical base papers consider highly stylized stochastic equilibrium models, which do not lend themselves to standard econometric analysis. The alternative, resorting to the calibration of these models, cannot provide the rigor of econometric analysis. Empirical analysis of IAP models is dominated by studies that use a linearized stochastic discount factor (SDF), such that regression analysis can be applied. However, the scope of such studies is limited, because the linearized model and the original framework are only loosely connected. The aim of this project is to build a stable bridge between theoretical IAP models and their empirical analysis. For that purpose, we rely on simulation-based methods, which we have used in prior work for the econometric analysis of important structural models in financial economics. These econometric approaches are a variant of the method of simulated moments and a version of the indirect inference method. The latter is explicitly designed to connect the theoretical and empirical models with the help of so-called binding functions. However, the application of these methods is not a trivial exercise. It requires a profound knowledge of the real-world data-generating processes as well as a deep understanding of the workings of the theoretical model. The RU provides an ideal environment for our project, because we can rely on the expertise of the collaborators specializing in theory as well as the empirically oriented researchers with a deep knowledge of the data. The econometric analysis will initially focus on seminal models of intermediary asset pricing. As the RU projects evolve, we will enlarge the scope to theoretical IAP models to be developed within the group. Besides simulation-based methods, we will also replace the aforementioned linearized models by alternatives that rely on the original non-linear SDF, which will be suitably extended. Using the (non-linear) generalized method of moments, we will perform empirical analyses that assess the role of financial intermediaries for different asset classes, and we will address an empirical puzzle that concerns the pro-cyclicality of the equity ratio of the intermediary sector. Our econometric framework allows to address these issues in a coherent methodological setting.