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.
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