The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
September 20th, 2019, 12:00-13:00, D4.0.133
Pietro Veronesi, The University of Chicago Booth School of Business
Title: "Leverage" (with Tano Santos)
Differential variation in households’ risk preferences over the business cycle affects the demand and supply of debt securities, which, in turn, affect intermediaries’ balance sheets. As in the data, our frictionless model predicts that intermediaries’ debt declines in contractions when their financial risk increases and asset prices drop, thus mimicking active deleveraging. As intermediaries’ leverage proxies for aggregate risk aversion, it predicts asset returns. Our model is consistent with poorer households borrowing more and with levered households deleveraging in crisis and "fire selling" their risky securities. Yet, as empirically observed, their debt-to-wealth ratios increase as higher discount rates make their wealth decline faster.