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Leverage and Asset Prices: An Experiment

Ana Fostel

Working Papers from The George Washington University, Institute for International Economic Policy

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 (i.e., 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 non-collateralizable assets does not increase during crises in contrast to what theory predicts.

Keywords: Leverage; Asset Pricing; Experimental Economics (search for similar items in EconPapers)
JEL-codes: A10 C90 G12 (search for similar items in EconPapers)
Date: 2012-01
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