Date of Award

Summer 8-7-2020

Degree Type

Dissertation

Degree Name

Ph.D.

Degree Program

Financial Economics

Department

Economics and Finance

Major Professor

Sudha Krishnaswami

Second Advisor

Luca Pezzo

Third Advisor

Walter J. Lane

Fourth Advisor

Arja H. Turunen-Red

Abstract

Even though they are parsimonious, financial intermediary pricing models deliver an impressive performance in the cross-section of expected returns. The premise of the theory behind such models is that intermediaries better represent the marginal investor because of their competency level as traders and because they are less exposed to frictions. In addition, researchers hint at market frictions contributing to the performance of factor models, whether they are theory-based or reduced-form. Motivated by the lack of empirical evidence, we study the performance of factor models conditional on frictions. First, we examine 13 frictions individually and find that they lack the ability to explain the cross-section of re- turns. Then, we create an index to represent the level of market frictions at each point in time. Importantly, We find that frictions collectively impact the performance of factor models. Consistent with the theories, we document that the performance of theory-based and reduced-form models differ depending on the level of frictions. In addition, we find evidence that intermediary-based models outperform household-based models, especially in periods of high frictions, as suggested by the theory. Our findings hold when using different specifications of the frictions index.

Rights

The University of New Orleans and its agents retain the non-exclusive license to archive and make accessible this dissertation or thesis in whole or in part in all forms of media, now or hereafter known. The author retains all other ownership rights to the copyright of the thesis or dissertation.

Available for download on Thursday, August 07, 2025

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