Brief description

In nine subprojects, the participating researchers are dedicated to the role of intermediaries in the formation of securities prices. The research group is supported by finance colleagues from Karlsruhe, Frankfurt, Tübingen, Stuttgart and Münster. In addition, there is an international cooperation with the WU Vienna.

The spokesperson of the research group is Marliese Uhrig-Homburg. Furthermore, Julian Thimme (since 2019 Junior Professor for Finance at FBV) is involved in the research group with his own project. Philipp Schuster (meanwhile holder of the Chair of Finance at the University of Stuttgart) was still a junior research group leader at KIT/FBV during the application phase and is also part of the research group.

In addition to the KIT-based coordination project (under the responsibility of Marliese Uhrig-Homburg), three other subprojects are located at KIT. Philipp Schuster, Julian Thimme, and Marliese Uhrig-Homburg and their teams are conducting research on bond markets (Project "Fragmented Intermediation, Bond Risk Premiums, and Market Stability"), on option markets (Project "Intermediation Frictions, Trader Positions, and Option Prices"), and on the interplay between equity and option markets (Project "Characterization of Asset Pricing Anomalies").

Understanding the structure and dynamics of risk premia is at the core of asset pricing. There is substantial variation of risk premia over time and across assets. One promising path to studying the variability in premia is to look at asset prices through the lens of frictions in financial intermediation. According to recent intermediary asset pricing models, such frictions are key to understanding asset prices and risk premia. The basic story works as follows: Direct investing is costly, so households give their money to intermediaries. Due to contracting frictions, regulatory constraints, or market entry barriers, intermediaries do not invest in full accordance with the preferences of households. As a result, intermediation frictions enter the pricing expressions for intermediated assets and impose a wedge between private valuation and market prices.

Clearly, a significant amount of investment is intermediated, and there is ample evidence that inter-mediation frictions cause price movements in various markets. The vast amount of this literature is motivated by crises phenomena. However, the relevance of intermediary frictions is not limited to crisis periods. So there is a definite need for a better understanding of the general role of intermedia-ries with respect to asset pricing.
As a Research Unit, we are guided by the theory on intermediary asset pricing. We want to sound out whether we can understand the big picture of heavily fluctuating prices and premia over time and across assets by a shift in paradigm: from the standard household perspective, with the notion that the household is always marginal, towards an intermediary perspective. If frictions in financial inter-mediation are important, they may allow prices to fluctuate more widely than suggested by standard models. Thus, instead of contributing to the vast literature that has produced a whole “zoo” of factors, we seek to identify key frictions and to separate their effects from classical risk factors. Starting from this, we aim to provide empirical strategies, models, and methods, use them to reach new insights about the formation of asset prices, and shape future research in the field.

To reach our goal, we are proposing a concerted, coherent, and comprehensive research program that covers various intermediaries, frictions, as well as a wide spectrum of assets. With our concept, we envision to improve our understanding of the interplay between intermediary frictions and risk premia. Asset prices, risk premia, and their dynamics are highly important economic quantities central to decisions regarding, e.g., consumption vs. investment and saving for retirement. Our results are thus of pronounced importance for households, investors, public policy, corporate decision making, and the macroeconomy as a whole.

Research Grant

Working papers and publications on this DFG project