Date of Award

May 2013

Degree Type


Degree Name

Doctor of Philosophy


Management Science

First Advisor

Lilian Ng

Committee Members

Kundan Kishor, Yong-Cheol Kim, Sanjoy Ghose, James Huang


Asset Pricing, Financial Intermediation


This dissertation consists of three essays on financial intermediation and asset pricing. In the first essay (Chapter 1), I investigate individuals' consumption-portfolio choices in the presence of financial intermediation. Unlike the existing literature where individuals seamlessly transform their savings to productive assets, I show that individuals employ intermediaries and that individuals' consumption growth is a scaled version of intermediaries' liabilities growth. As a consequence, the growth of intermediaries' balance sheet variables, such as liabilities and assets, determines the stochastic discount factor. That is, it is shown that the stochastic discount factor for asset returns is affine in intermediaries' balance sheet shocks. The empirical tests of the Euler equation help resolve equity premium and risk-free rates puzzles.

In the second essay (Chapter 2), I derive an investment-based asset pricing kernel under the funding constraints of financial intermediaries. The intermediation-augmented investment-based model shows that the stochastic discount factor for asset returns is affine in intermediary funding shocks. It is shown that the existing investment-based asset pricing models are a special case of a general asset pricing kernel. Intermediation factors, measured by intermediary balance sheet shocks, explain size and value premiums and behave as state variables predicting market returns. In the cross-section of size, value, and industry portfolios, intermediation factors are priced and outperform the existing investment-based and productivity-based factors. Importantly, the single-intermediation-factor model performs as well as portfolio-based asset pricing models.

The third essay (Chapter 3), investigates the relationship between systematic intermediation risk and asset market liquidity. The findings contrast with the existing literature that derive firm productivity, and hence stock returns in the absence of financial intermediation. I incorporate the theoretical results of the second essay and argue that asset liquidity is a function of intermediary balance sheet shocks. Using intermediaries' balance sheet data from 1955 to 2009, the empirical results support the model predictions. The results further show that the observed commonality in stock liquidity can be explained by systematic intermediation risk.