In recent years, we observe growing commonality in asset price movements and less potential for diversification as an immediate result. A common market factor accounts for most variation in asset price movements. One possible explanation of this observation is supplied by the recent literature on intermediary asset pricing. In intermediary asset pricing, the standard pricing kernel of the household is replaced by a pricing kernel of intermediaries following the argument that households lack expertise in trading assets, especially in more sophisticated assets like derivatives, and the biggest share of trades is executed between intermediaries. In line with intermediary asset pricing theory, assets’ exposure to intermediary capital ratios possesses strong explanatory power for cross-sectional differences in average returns across different markets.

Given that intermediaries determine the marginal price of many asset classes, risk premia should be explained via intermediaries’ preferences. In line with this argumentation, market makers should demand a risk premium for the substantial risk exposure in their portfolios which cannot be hedged completely.

Changes in the intermediary capital ratio may be triggered by several factors, one of which are large abnormal gains or losses in parts of an intermediary’s portfolio. Consequently, a joint crash of multiple assets at the same time has significant impact on equity capital ratios, and assets that exhibit a higher likelihood for joint crashes will be traded at a premium. Therefore, assets that exhibit high tail dependence should trade a premium as the joint crash will lower intermediaries’ equity ratios. Moreover, we should observe a relationship between tail dependence and asset price movements across different asset classes.

In our paper, “The determinants of CDS spreads: evidence from the model space“ we study the case of CDS contracts and show that a measure of tail dependence provides the highest explanatory power for CDS price dynamics. Moreover, our research shows that other potential determinants are negligible.



  • Pelster, M.; Vilsmeier, J. (2017): ‘The determinants of CDS spreads: evidence from the model space’. Review of Derivatives Research 21, 63-118.



  • Pelster, M. ; Schertler, A. (2016): ‘Pricing and issuance dependencies in SFP portfolios’.