Habits and Leverage

52 Pages Posted: 30 Nov 2016 Last revised: 1 Dec 2016

Tano Santos

Columbia University

Pietro Veronesi

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

Date Written: November 29, 2016


Many stylized facts of leverage, trading, and asset prices follow from a frictionless general equilibrium model that features agents’ heterogeneity in endowments and habit preferences. Our model predicts that aggregate debt increases in good times when stock prices are high, return volatility is low, and levered agents enjoy a “consumption boom.” Our model is consistent with poorer agents borrowing more and with recent evidence on intermediaries’ leverage being a priced factor of asset returns. In crisis times, levered agents strongly deleverage by “fire selling” their risky assets as asset prices drop. Yet, consistently with the data, their debt-to-wealth ratios increase because their wealth decline faster due to higher discount rates.

Suggested Citation

Santos, Tano and Veronesi, Pietro, Habits and Leverage (November 29, 2016). Fama-Miller Working Paper ; Chicago Booth Research Paper No. 16-22. Available at SSRN: https://ssrn.com/abstract=2876850 or http://dx.doi.org/10.2139/ssrn.2876850

Tano Santos

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Pietro Veronesi (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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