Leverage

51 Pages Posted: 12 Dec 2016

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 2016

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.

Suggested Citation

Santos, Tano and Veronesi, Pietro, Leverage (December 2016). NBER Working Paper No. w22905, Available at SSRN: https://ssrn.com/abstract=2883922

Tano Santos (Contact Author)

Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Pietro Veronesi

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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United States

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