Job Market Paper
Leverage Clienteles (Nov, 2019)
Abstract: We present a model in which leveraged and unleveraged investors face uncertainty with regard to margin requirements. We show that under these conditions, investors hedge their risks. Leveraged investors hold portfolios whose returns correlate negatively with the supply of leverage. In contrast, the returns of unleveraged investors correlate positively with leverage supply. We also show that the size of these correlations should be proportional to the expected volatility of the margin requirements. We test these hypotheses using the returns of the most significant type of unleveraged investors, namely mutual funds. We show that, following the financial crisis, mutual funds’ returns load positively and significantly on measures of leverage risk across multiple asset classes. We also show that, consistent with the hedging hypothesis, the past loading of mutual funds on the leverage risk factor positively and significantly predicts the future realized volatility of this factor.
Work in Progress
The Effect of Skewness on the Demand for and the Performance of Hedge Funds” (2019)
with A. Sinclair