Leverage

50 Pages Posted: 1 Dec 2016 Last revised: 23 Dec 2018

See all articles by Tano Santos

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: December 22, 2018

Abstract

Many stylized facts of leverage, trading, and asset prices obtain in a frictionless general equilibrium model that features agents’ heterogeneity in endowments and time-varying risk preferences. Our model predicts that aggregate debt increases in expansions when asset prices are high, volatility is low, and levered households enjoy a “consumption boom.” Our model is consistent with poorer households borrowing more and with intermediaries’ leverage being a priced factor. In crises, levered households strongly delever by “fire selling” their risky assets as asset prices drop. Yet, as empirically observed, their debt-to-wealth ratios increase as higher discount rates make their wealth decline faster.

Keywords: Risk Preferences, Leverage, Heterogeneity, Intermediary

JEL Classification: G12, E44, E21

Suggested Citation

Santos, Tano and Veronesi, Pietro, Leverage (December 22, 2018). Columbia Business School Research Paper No. 17-1, Available at SSRN: https://ssrn.com/abstract=2876241 or http://dx.doi.org/10.2139/ssrn.2876241

Tano Santos

Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Pietro Veronesi (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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