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Leverage Is a Double‐Edged Sword

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  • AVANIDHAR SUBRAHMANYAM
  • KE TANG
  • JINGYUAN WANG
  • XUEWEI YANG

Abstract

We use proprietary data on intraday transactions at a futures brokerage to analyze how implied leverage influences trading performance. Across all investors, leverage is negatively related to performance, due partly to increased trading costs and partly to forced liquidations resulting from margin calls. Defining skill out‐of‐sample, we find that relative performance differentials across unskilled and skilled investors persist. Unskilled investors' leverage amplifies losses from lottery preferences and the disposition effect. Leverage stimulates liquidity provision by skilled investors, and enhances returns. Although regulatory increases in required margins decrease skilled investors' returns, they enhance overall returns, and attenuate return volatility.

Suggested Citation

  • Avanidhar Subrahmanyam & Ke Tang & Jingyuan Wang & Xuewei Yang, 2024. "Leverage Is a Double‐Edged Sword," Journal of Finance, American Finance Association, vol. 79(2), pages 1579-1634, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:1579-1634
    DOI: 10.1111/jofi.13316
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