Leverage and Asset Prices : Evidence from the Chinese Structured Funds

We test the asset pricing implications of collateralized borrowing using the Chinese structured A-B funds. The funds are special in that the prices for the same asset with and without leverage are simultaneously observed with the leverage exogenously determined and time-varying. We find that assets that can be leveraged have higher prices than assets that cannot, even if the payoff is the same. The discrepancy in between is the collateral value that leads to the deviation from the law of one price. Furthermore, looser collateral constraint leads to higher collateral value, thus higher asset prices