Authors: Tobias Adrian, Erkko Etula, and Tyler Muir

We document that risky asset returns can largely be explained by their covariances with shocks to the aggregate leverage of security broker-dealers. Our single-factor leverage model compares favorably with existing asset pricing benchmarks, including multi-factor equity models tested in the cross-sections sorted by size and book-to-market, momentum, and industries. The model also performs well in the cross section of Treasury bond portfolios sorted by maturity. Our findings indicate that broker dealer leverage is a valid representation of the stochastic discount factor, an interpretation consistent with recent intermediary asset pricing theories.