Leverage Constraints Affect Portfolio Choice: Evidence from Closed-End Funds

90 Pages Posted: 12 Jan 2021 Last revised: 2 Jan 2024

Date Written: December 31, 2023


The market for auction rate securities collapsed in February 2008, significantly increasing some closed-end funds' cost of funding. The affected funds reacted by moving to a leverage-constrained funding structure. We present a model that explains this fund behavior and then use the event as a quasi-natural experiment to study empirically how leverage constraints affect investors' portfolio choices. Consistent with our model's predictions, we show that tightened constraints result in an increased appetite for systematic risk: in the months following the shock, the affected funds increased their portfolio betas by buying significantly more high-beta stocks than their unaffected peers.

Keywords: leverage constraints, portfolio choice

JEL Classification: G10, G11

Suggested Citation

Jylha, Petri and Rintamäki, Paul, Leverage Constraints Affect Portfolio Choice: Evidence from Closed-End Funds (December 31, 2023). Available at SSRN: https://ssrn.com/abstract=3722010 or http://dx.doi.org/10.2139/ssrn.3722010

Petri Jylha (Contact Author)

Aalto University ( email )

P.O. Box 21220
Aalto, 00076

Paul Rintamäki

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

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