Habits and Leverage

55 Pages Posted: 30 Nov 2016 Last revised: 10 Jun 2017

See all articles by Tano Santos

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: June 7, 2017


Many stylized facts of leverage, trading, and asset prices obtain in a frictionless general equilibrium model that features agents' heterogeneity in endowments and habit preferences. Our model predicts that aggregate debt increases in expansions when asset prices are high, volatility is low, and levered agents enjoy a "consumption boom." Our model is consistent with poorer agents borrowing more and with intermediaries' leverage being a priced factor. In crises, 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 as higher discount rates make their wealth decline faster.

Suggested Citation

Santos, Tano and Veronesi, Pietro, Habits and Leverage (June 7, 2017). Chicago Booth Research Paper No. 16-22; Fama-Miller Working Paper . 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)

United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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