Working Paper: NBER ID: w22905
Authors: Tano Santos; Pietro Veronesi
Abstract: Many stylized facts of leverage, trading, and asset prices obtain in a frictionless general equilibrium model that features agents’ heterogeneity in endowments and time- varying risk preferences. Our model predicts that aggregate debt increases in expansions when asset prices are high, volatility is low, and levered households enjoy a “consumption boom.” Our model is consistent with poorer households borrowing more and with intermediaries’ leverage being a priced factor. In crises, levered households strongly delever by “fire selling” their risky assets as asset prices drop. Yet, as empirically observed, their debt-to-wealth ratios increase as higher discount rates make their wealth decline faster.
Keywords: leverage; risk preferences; financial crisis
JEL Codes: E21; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic conditions (E66) | household leverage (G51) |
| high asset prices and low volatility (G19) | aggregate debt (E10) |
| levered households (G59) | consumption boom (E21) |
| poorer households (D19) | borrow more (G51) |
| asset prices drop (G19) | levered households deleverage (G59) |
| higher discount rates (E43) | wealth decline (E21) |
| household income growth (D19) | risk tolerance increase (G40) |
| risk-averse households (D11) | sell assets to repay debt (G32) |
| debt normalized by income (H69) | household leverage is procyclical (G59) |
| debt normalized by net worth (F34) | household leverage is countercyclical (G59) |