NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Habits and Leverage

Tano Santos, Pietro Veronesi

NBER Working Paper No. 22905
Issued in December 2016, Revised in June 2017
NBER Program(s):AP, EFG

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.

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Document Object Identifier (DOI): 10.3386/w22905

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