Abstract

https://ssrn.com/abstract=2269889
 
 

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Speculation and Leverage


Mark Loewenstein


University of Maryland - Robert H. Smith School of Business

May 24, 2013

Asian Finance Association (AsFA) 2013 Conference

Abstract:     
Speculative episodes typically involve leverage. For example, the well known tulip-mania episode was accompanied by the introduction of foward contracts which allowed speculators to take leveraged positions in tulip bulbs. More recently, the Great Crash of 1929 was exacerbated by leveraged trusts which used leverage to buy stocks. These leveraged trusts could in turn be bought on margin which allowed speculators to hold highly leveraged positions. More recently, speculation in the housing market was accompanied by extreme leverage. In this paper, I provide a continuous time extension of the Harrison-Kreps(1978) speculative model. When the riskless rate is fixed, the speculative premium for each investor is given by their expected present value of excess aggregate consumption over the dividend. They also expect the wealth of other investors with different beliefs to grow unboundedly negative. Letting the riskless rate adjust so that the market for borrowing clears provides endogenous margin requirements which limit borrowing. In addition, the wealth distribution of speculators now becomes a determinant of speculative premia and a fairly rich set of speculative dynamics arise.

Number of Pages in PDF File: 43


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Date posted: May 24, 2013  

Suggested Citation

Loewenstein, Mark, Speculation and Leverage (May 24, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2269889 or http://dx.doi.org/10.2139/ssrn.2269889

Contact Information

Mark Loewenstein (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
College Park, MD 20742-1815
United States
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