Peters (2011a) defined an optimal leverage which maximizes the time-average growth rate of an investment held at constant leverage. We test the hypothesis that this optimal leverage is attracted to 1, such that leveraging an investment in the market portfolio cannot yield long-run outperformance. Historical data support the hypothesis. This places a strong constraint on the stochastic properties of traded assets, which we call "leverage efficiency." Market conditions that deviate from leverage efficiency are unstable and may create leverage-driven bubbles. This result resolves the equity premium puzzle, informs interest rate setting, and constitutes a theory of noise in financial markets.
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