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

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 balances. We model capital-market yields, as conditioned by market-wide leverage, an indicator of debt availability. Using a VAR framework, we examine variance decompositions and impulse-response functions. We show that leverage and its investment-related effect 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