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Leverage and Asset Prices: An Experiment

38 Pages Posted: 8 Feb 2012  

Marco Cipriani

Federal Reserve Bank of New York

Ana Fostel

University of Virginia

Daniel Houser

George Mason University - Department of Economics; Interdisciplinary Center for Economic Science

Multiple version iconThere are 2 versions of this paper

Date Written: February 7, 2012

Abstract

This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: when an asset can be used as collateral (i.e., when the asset can be bought on margin), its price goes up. This increase is significant, and quantitatively close to what theory predicts. However, important deviations from the theory arise in the laboratory. First, the demand for the asset shifts when it can be used as a collateral, even though agents do not exhaust their purchasing power when collateralized borrowing is not allowed. Second, the spread between collateralizable and non-collateralizable assets does not increase during crises in contrast to what theory predicts.

Keywords: leverage, asset pricing, experimental economics

JEL Classification: A10, C90, G12

Suggested Citation

Cipriani, Marco and Fostel, Ana and Houser, Daniel, Leverage and Asset Prices: An Experiment (February 7, 2012). GMU Working Paper in Economics No. 12-05. Available at SSRN: https://ssrn.com/abstract=2000466 or http://dx.doi.org/10.2139/ssrn.2000466

Marco Cipriani

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Ana Fostel

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Daniel Houser (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Interdisciplinary Center for Economic Science ( email )

5th Floor, Vernon Smith Hall
George Mason University
Arlington, VA 22201
United States
7039934856 (Phone)

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