Intermediary Asset Pricing and the Swedish Equity Market

Sammanfattning: Increasingly, the focus of asset pricing research has shifted from the average household to the more sophisticated financial intermediaries. Our paper is the first to introduce this notion to the Swedish equity market by testing two intermediary asset pricing models, one based on shocks to broker-dealer leverage, and the other based on the return on aggregate wealth together with shocks to the primary dealer capital ratio. While both these models outperform standard benchmark models on US financial markets, applied to the Swedish equity market, only the model based on broker-dealer leverage outperforms the benchmarks, with a total mean absolute pricing error of 6.8% per annum. Our results do not prove the validity of the model, but rather bring into question the validity of the standard benchmarks.