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A model of leverage based on risk sharing

Wang, Tianxi (2013) 'A model of leverage based on risk sharing.' Economics Letters, 119 (1). pp. 97-100. ISSN 0165-1765

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This paper offers a new approach, based on risk sharing, to endogenize the leverage of financial intermediaries. It endogenizes debt as the optimal contract for external financing, thereby capturing two features of leverage: debt serves to boost the return on equity, and equity provides “safety net” for debt. The paper derives a novel prediction that when the asset-side risk rises, the leverage ratio is reduced, but the profit margin of leveraging is actually widened.

Item Type: Article
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Economics, Department of
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 18 Oct 2013 12:47
Last Modified: 15 Jan 2022 00:47

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