{"title":"Investor Demand for Leverage: Evidence from Equity Closed-End Funds","authors":"Robert Dam, Shaun William Davies, S Katie Moon","doi":"10.1093/rapstu/raad012","DOIUrl":null,"url":null,"abstract":"We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32) Received December 5, 2021; editorial decision February 7, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"2 1","pages":""},"PeriodicalIF":2.2000,"publicationDate":"2023-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Review of Asset Pricing Studies","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1093/rapstu/raad012","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32) Received December 5, 2021; editorial decision February 7, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
期刊介绍：
The Review of Asset Pricing Studies (RAPS) is a journal that aims to publish high-quality research in asset pricing. It evaluates papers based on their original contribution to the understanding of asset pricing. The topics covered in RAPS include theoretical and empirical models of asset prices and returns, empirical methodology, macro-finance, financial institutions and asset prices, information and liquidity in asset markets, behavioral investment studies, asset market structure and microstructure, risk analysis, hedge funds, mutual funds, alternative investments, and other related topics.
Manuscripts submitted to RAPS must be exclusive to the journal and should not have been previously published. Starting in 2020, RAPS will publish three issues per year, owing to an increasing number of high-quality submissions. The journal is indexed in EconLit, Emerging Sources Citation IndexTM, RePEc (Research Papers in Economics), and Scopus.
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