50 Pages Posted: 1 Dec 2016 Last revised: 23 Dec 2018
Date Written: December 22, 2018
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: Suggested Citation