September 2020

Intermediary Asset Pricing during the National Banking Era

Colin R. Weiss

Abstract:

Financial intermediary balance sheets matter for asset returns even when these intermediaries do not directly participate in the relevant asset markets. During the National Banking Era, liquidity conditions for the New York Clearinghouse (NYCH) banks forecast excess returns for stocks, bonds, and currencies. The NYCH banks had little to no direct participation in these markets; their main link to these markets was through securities financing. Liquidity conditions affect asset prices through the credit growth of the NYCH banks, which shapes marginal investors' discount rates. I use institutional features of this era to provide evidence in favor of this mechanism.

Keywords: Liquidity management, Margin loans, Intermediary asset pricing, National banks

DOI: https://doi.org/10.17016/IFDP.2020.1302

PDF: Full Paper

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Last Update: September 18, 2020