Leverage and Asset Prices: An Experiment

36 Pages Posted: 28 Jan 2020 Last revised: 17 Dec 2021

See all articles by Marco Cipriani

Marco Cipriani

Federal Reserve Bank of New York

Ana Fostel

University of Virginia - Department of Economics

Daniel Houser

George Mason University - Department of Economics; Interdisciplinary Center for Economic Science; George Mason University - Mercatus Center

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Date Written: January 2020

Abstract

We develop a model of leverage that is amenable to laboratory implementation and gather experimental data. We compare two identical economies: in one economy, agents cannot borrow; in the other, they can leverage a risky asset to issue debt. Leverage increases asset prices in the laboratory. This increase is significant and quantitatively close to what theory predicts. Moreover, also as theory suggests, leverage allows gains from trade to be realized in the laboratory. Finally, the mechanism generating the price increase in the lab is due to the asset role as collateral, and different from what we would observe with a simple credit line or bigger cash endowments.

Suggested Citation

Cipriani, Marco and Fostel, Ana and Houser, Daniel, Leverage and Asset Prices: An Experiment (January 2020). NBER Working Paper No. w26701, Available at SSRN: https://ssrn.com/abstract=3525942

Marco Cipriani (Contact Author)

Federal Reserve Bank of New York ( email )

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Ana Fostel

University of Virginia - Department of Economics ( email )

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Daniel Houser

George Mason University - Department of Economics ( email )

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