The recent recession in the US saw an unusually large and persistent decline in output, low inflation and deflation, significant house price declines, and short term interest rates near zero. Much discussion of this episode has centered around financial markets and the high leverage positions at the onset of the recession. In this paper, we analyze the role of leverage in determining the proper...

We develop a model of asset trading with financial leverage in an economy with a continuum of investors. The investors are assumed to have diverse and rational beliefs in the sense of being compatible with observed data. We show that a reduction in the margin requirement may cause the stock price to rise in the current period because it increases the demand of optimistic investors through a “le...

Our paper studies an economy in which each financial institution takes into account that if it has to sell its assets after others have already sold, the price will be lower. This causes preemptive selling, driven not by actual margin calls, but by the fear of future margin calls. Financial institutions cannot determine their optimal capitalizations in isolation, but need to know the aggregate ...

The export sector is considered an important sector for developing countries; hence it is important to understand the behavior of exporting firms. This paper looks at the financial structure of such firms and investigates plausible relationships between export status and leverage. If product demand from abroad has a low correlation with domestic demand, we would expect export-intensive firms to...

Consumer leverage can contribute to nancial crises such as the subprime mortgage crisis characterized by increased bankruptcy prospects and tightened credit access. This paper embeds nancial frictions in the mortgage contracts of home-buyers within a two-sector economy to show that although households are not production agents and may not start as highly leveraged as nancial institutions, their...

We prove that Brownian market models with random diffusion coefficients provide an exact measure of the leverage effect [J-P. Bouchaud et al., Phys. Rev. Lett. 87, 228701 (2001)]. This empirical fact asserts that past returns are anticorrelated with future diffusion coefficient. Several models with random diffusion have been suggested but without a quantitative study of the leverage effect. Our...

This paper tests for changes in firms' production and pricing decisions in four industries in which firms have sharply increased their financial leverage. The analysis of product price and quantity data show that industry product market decisions are associated with capital structure. In three industries, output is negatively associated with the average industry debt ratio. In the one industry ...

The paper investigates the link between the optimal level of non-financial firms’ shortterm leverage and macroeconomic and idiosyncratic sources of uncertainty. We develop a structural model of a firm’s value maximization problem that predicts a negative relationship between uncertainty and optimal level of borrowing. This proposition is tested using a panel of non-financial US firms drawn from...

This article proposes stochastic conditional duration (SCD) models with ‘‘leverage effect’’ for financial transaction data, which extends both the autoregressive conditional duration (ACD) model (Engle and Russell, 1998, Econometrica, 66, 1127–1162) and the existing SCD model (Bauwens and Veredas, 2004, Journal of Econometrics, 119, 381–412). The proposed models belong to a class of linear nong...