Do Intermediaries Matter for Aggregate Asset Prices?

We propose a simple framework for intermediary asset pricing. Two elements shape if and how intermediaries matter for asset prices: how they make investment decisions (preference alignment), and the extent to which final investors offset their decisions by direct trading (substitution). We show that existing empirical evidence has not provided causal evidence that intermediaries matter for asset prices. We then provide a simple test: a sufficient condition for intermediaries to matter for asset prices is to document a larger elasticity of the risk premia of intermediated assets to changes in intermediary risk appetite. That is, intermediary health matters more for assets that households have difficulty buying directly. We provide direct empirical evidence that this is the case and hence show that intermediaries matter for a number of key asset classes including CDS, commodities, sovereign bonds, and FX. ∗UCLA and NBER. We thank Markus Brunnermeier, Itamar Drechsler, Andrea Eisfeldt, Francis Longstaff, Arvind Krishnamurthy, Adrien Matray, Alan Moreira and participants at UCLA and the Wharton Conference on Liquidity and Financial Fragility for comments.