Intermediaries and Asset Prices: Evidence from the U.S., U.K., and Japan, 1870-2016

Abstract

We study data on commercial banks and securities firms across multiple countries since 1870. Balance sheet expansion of leveraged intermediaries negatively predicts returns of stocks, bonds, currencies, and housing. The predictability is stronger at shorter horizons, is robust to macroeconomic controls, and holds outside distress periods, in contrast to models featuring nonlinearities during distress. Intermediaries in global financial centers predict international equity returns. A new dataset on individual stock holdings of Japanese intermediaries since 1955 shows intermediaries affect returns of stocks directly held. Our results suggest a strong universal link between intermediaries and asset returns distinct from macroeconomic channels.