Investing in a leveraged world

Ahn, K; Hambusch, G; Hong, K; Navone, M

Investing in a leveraged world

Ahn, K Hambusch, G

Hong, K Navone, M

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Publisher:: Emerald
Publication Type:: Journal Article
Citation:: International Journal of Managerial Finance, 2024, 20, (4), pp. 998-1020
Issue Date:: 2024

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Field	Value	Language
dc.contributor.author	Ahn, K
dc.contributor.author	Hambusch, G https://orcid.org/0000-0003-4289-4279
dc.contributor.author	Hong, K
dc.contributor.author	Navone, M https://orcid.org/0000-0002-6273-1808
dc.date.accessioned	2024-07-10T04:16:13Z
dc.date.available	2024-07-10T04:16:13Z
dc.date.issued	2024
dc.identifier.citation	International Journal of Managerial Finance, 2024, 20, (4), pp. 998-1020
dc.identifier.issn	1743-9132
dc.identifier.issn	1758-6569
dc.identifier.uri	http://hdl.handle.net/10453/179762
dc.description.abstract	Purpose: Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market. Design/methodology/approach: The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium. Findings: The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors. Originality/value: This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature.
dc.language	English
dc.publisher	Emerald
dc.relation.ispartof	International Journal of Managerial Finance
dc.relation.isbasedon	10.1108/ijmf-12-2022-0538
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment
dc.subject.classification	3501 Accounting, auditing and accountability
dc.subject.classification	3502 Banking, finance and investment
dc.title	Investing in a leveraged world
dc.type	Journal Article
utslib.citation.volume	20
utslib.for	1501 Accounting, Auditing and Accountability
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	University of Technology Sydney
pubs.organisational-group	University of Technology Sydney/Faculty of Business
pubs.organisational-group	University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access	*
pubs.consider-herdc	true
dc.date.updated	2024-07-10T04:16:09Z
pubs.issue	4
pubs.publication-status	Published
pubs.volume	20
utslib.citation.issue	4

Abstract:

Purpose: Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market. Design/methodology/approach: The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium. Findings: The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors. Originality/value: This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature.

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http://hdl.handle.net/10453/179762