Séminaire
Embedded Leverage
Lasse Heje Pedersen (New York University Stern)
Paul Woolley Research Initiative Seminar
IDEI, 3 juin 2013, 12h30–14h00, salle MF 323
Référence
Lasse Heje Pedersen (New York University Stern), « Embedded Leverage », Paul Woolley Research Initiative Seminar, IDEI, 3 juin 2013, 12h30–14h00, salle MF 323.
Résumé
Many financial instruments are designed with embedded leverage such as options and leveraged exchange traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find that asset classes with embedded leverage offer low risk-adjusted returns and, in the cross-section, higher embedded leverage is associated with lower returns. A portfolio which is long low-embedded-leverage securities and short high-embedded-leverage securities earns large abnormal returns, with t-statistics of 8.6 for equity options, 6.3 for index options, and 2.5 for ETFs. We provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics.
Partenaire de recherche
Paul Woolley Research Initiative