A model of leverage based on risk sharing

Tianxi Wang

Economics Letters, 2013, vol. 119, issue 1, 97-100

Abstract: This paper offers a new approach, based on risk sharing, to endogenize the leverage of financial intermediaries. It endogenizes debt as the optimal contract for external financing, thereby capturing two features of leverage: debt serves to boost the return on equity, and equity provides “safety net” for debt. The paper derives a novel prediction that when the asset-side risk rises, the leverage ratio is reduced, but the profit margin of leveraging is actually widened.

Keywords: Risk sharing; Leverage; Financial intermediaries (search for similar items in EconPapers)
JEL-codes: D86 G20 G30 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:119:y:2013:i:1:p:97-100

DOI: 10.1016/j.econlet.2013.02.001

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