Leverage Cycles in a Mature Asset Class: New Evidence from a Natural Laboratory

Friday October 12, 2018
  • Working Paper

Abstract

We model leverage cycles in the natural laboratory of a mature asset class, namely US Commercial Real Estate. In this setting we can observe entrepreneurs’ asset values as well as debt balance and thus model capital-market yields, as conditioned by market-wide leverage, which indicates debt availability. Using a VAR framework, we examine variance decompositions and impulse-response functions. We show that leverage constitutes the primary driver of innovations in capital-market yields and vice versa. We further find evidence for flight to quality as well as knock-on effects that affect low-leverage entrepreneurs in the market.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

Citation

Connolly, R.A., & Mühlhofer, T. (2018). Leverage cycles in a mature asset class: New evidence from a natural laboratory [Working Paper].