38 Pages Posted: 8 Feb 2012
Date Written: February 7, 2012
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: 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