This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: when an asset can be used as collateral (i.e., when the asset can be bought on margin), its price goes up. This increase is significant,...

This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: When an asset can be used as collateral (that is, when the asset can be bought on margin), its price goes up. This increase is significant,...

This paper examines Latin America’s access to international capital markets from 1980 to 2005, with particular attention to the role of domestic and external factors. To capture access to international markets, we use primary gross issuance in international bond, equity, and syndicated-loan...

We provide a theory of pricing for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. Our model provides an explanation for the volatile access of emerging economies to international financial markets and for several stylized...

Recent debt crises in Europe have highlighted the role of asymmetric information about fiscal shocks in accounting for sudden hikes in country risk. We develop a model where such asymmetry of information combined with the persistence of tax shocks can produce a sudden inward shift in the supply...

The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which...

Financial innovations that change how promises are collateralized can affect investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates over-investment compared to Arrow Debreu. The introduction of CDS always leads to...

We show that financial innovations that change the collateral capacity of assets in the economy can affect investment even in the absence of any shift in utilities, productivity, or asset payoffs. First we show that the ability to leverage an asset by selling non-contingent promises can generate...

Our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral. Our Binomial No-Default Theorem states that any equilibrium is equivalent (in real allocations and prices) to another equilibrium in which there is no...