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Leverage and asset prices: an experiment

Author

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  • Marco Cipriani
  • Ana Fostel
  • Daniel Houser

Abstract

This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: When an asset can be used as collateral (that is, when the asset can be bought on margin), its price goes up. This increase is significant, and quantitatively close to what theory predicts. However, important deviations from the theory arise in the laboratory. First, the demand for the asset shifts when it can be used as a collateral, even though agents do not exhaust their purchasing power when collateralized borrowing is not allowed. Second, the spread between collateralizable and noncollateralizable assets does not increase during crises, in contrast to what theory predicts.

Suggested Citation

  • Marco Cipriani & Ana Fostel & Daniel Houser, 2012. "Leverage and asset prices: an experiment," Staff Reports 548, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:548
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    References listed on IDEAS

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    5. Fostel, Ana & Geanakoplos, John, 2012. "Why does bad news increase volatility and decrease leverage?," Journal of Economic Theory, Elsevier, vol. 147(2), pages 501-525.
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    11. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-1244, September.
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    Cited by:

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    4. Mehmet Benturk & Marshall J. Burak, 2018. "Modelling Haircuts: Evidence from NYSE Stocks," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(4), pages 1-6.

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    More about this item

    Keywords

    Asset pricing; Financial leverage;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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