Discussion paper

DP11681 Habits and Leverage

Many stylized facts of leverage, trading, and asset prices follow from a frictionless general equilibrium model that features agents’ heterogeneity in endowments and habit preferences. Our model predicts that aggregate debt increases in good times when stock
prices are high, return volatility is low, and levered agents enjoy a “consumption boom.” Our model is consistent with poorer agents borrowing more and with recent evidence on intermediaries’ leverage being a priced factor of asset returns. In crisis times, levered
agents strongly deleverage by “fire selling” their risky assets as asset prices drop. Yet, consistently with the data, their debt-to-wealth ratios increase because their wealth decline faster due to higher discount rates.


Veronesi, P and T Santos (2016), ‘DP11681 Habits and Leverage‘, CEPR Discussion Paper No. 11681. CEPR Press, Paris & London. https://cepr.org/publications/dp11681