Leverage and Asset Prices: An Experiment

38 Pages Posted: 25 Feb 2012

See all articles by Marco Cipriani

Marco Cipriani

Federal Reserve Bank of New York

Ana Fostel

International Monetary Fund (IMF)

Daniel Houser

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

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 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 (that is, 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 noncollateralizable 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 1, 2012). FRB of New York Staff Report No. 548, Available at SSRN: https://ssrn.com/abstract=2008977 or http://dx.doi.org/10.2139/ssrn.2008977

Marco Cipriani (Contact Author)

Federal Reserve Bank of New York ( email )

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Ana Fostel

International Monetary Fund (IMF) ( email )

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Daniel Houser

George Mason University - Department of Economics ( email )

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HOME PAGE: http://mason.gmu.edu/~dhouser/

George Mason University - Mercatus Center ( email )

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