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Intermediary asset pricing posits that financial institutions play a central role in financial markets, and that their decisions shape asset prices beyond simply reflecting the preferences of the average household. This perspective helps make sense of key empirical patterns: the excess volatility of asset prices, differences in price movements across asset classes, the cross-section of expected returns within asset classes, and specific arbitrage opportunities and price dislocations. We also review the implications of intermediary asset pricing for macroeconomic dynamics, international economics, and policy. In this approach, a primary channel of financial regulation and monetary policy is through alleviating constraints or removing risk from intermediary balance sheets during periods of stress. We highlight both existing progress and gaps for future research.
