Do Intermediaries Matter for Aggregate Asset Prices?

UCLA Anderson Associate Professors of Finance Valentin Haddad and Tyler Muir are the 2022 first-place recipients of the Dimensional Fund Advisors Prize for their paper Do Intermediaries Matter for Aggregate Asset Prices? which appeared in the December 2021 issue of The Journal of Finance, published by the American Finance Association.

“We are very honored by this recognition and take it as a challenge to continue doing high-quality research,” Haddad says. “We started working together when we joined UCLA in 2016 and have received a lot of support from our finance area colleagues, as well as the broader Anderson community. It is nice to get to do our part and bring some light on the school.”.

The paper, as the title suggests, explores the relationship between financial intermediaries and asset prices. Haddad and Muir observed that asset prices dropped when major intermediaries began to falter. They wanted to know if the assets were actually worth less as a result of intermediaries’ failure or because of the perception they might fail if other, broader economic issues were also to blame for asset prices’ falling.

The pair cite the financial crisis of 2008–09 to explain the phenomena, noting that big banks, financial institutions and hedge funds found themselves in trouble, and that household names like Lehman Brothers were failing. Simultaneously, there were ongoing disruptions in the financial markets.

“There were bad macroeconomic shocks happening at the same time these intermediaries were failing,” Muir says. “So it wasn’t clear how much of the asset price disruption was coming just from the financial institutions’ getting in trouble versus other factors that typically happen in a recession.”

The pair’s findings were significant.

“We show that the health of the financial sector — for example, large investment banks — matters for asset valuations in many markets,” says Haddad. “The importance of a healthy financial sector is more pronounced in more intermediated markets, such as for credit or mortgage-backed securities, and less so in the stock market. In particular, during financial crises, all security markets crash — not so much because of households’ worries, but because the financial sector is not working anymore.”

The Dimensional Fund Advisors Prizes are awarded annually for the top three papers in The Journal of Finance in any area other than corporate finance. The winning papers are chosen by the associate editors of The Journal of Finance. The 2022 awards were announced at the American Finance Association’s January 2023 conference. Prior first prize recipients among our faculty include: Distinguished Professor of Finance and Goldyne and Irwin Hearsh Chair in Money and Banking Avanidhar Subrahmanyam (1999); Professor of Finance and Robert D. Beyer ’83 Term Chair in Management Stavros Panageas (2012); Professor of Finance and Laurence D. and Lori W. Fink Endowed Chair in Finance Andrea Eisfeldt (2013); and Associate Professor of Finance Barney Hartman-Glaser (2020).