default and their financial positions are not mutually observable. We show that there is "excess leverage" in that parties …, or a centralized counterparty (such as an exchange) that observes all trades and sets prices. While collateral …

observable. We show that in this setting, there is excess "leverage" in that parties in OTC contracts take on short positions …

, which enables increased leverage and investment. In the absence of frictions in the securitization process, we show that the …-investment. We examine policies to correct over-investment and find that a leverage ratio restriction generates a Pareto improvement …, while forcing originators to hold additional skin-in-the-game reduces welfare. Both policies reduce leverage and raise …

A recent literature shows how an increase in volatility reduces leverage. However, in order to explain pro …-cyclical leverage it assumes that bad news increases volatility, that is, it assumes an inverse relationship between first and second … volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest …

A recent literature shows how an increase in volatility reduces leverage. However, in order to explain pro …-cyclical leverage it assumes that bad news increases volatility, that is, it assumes an inverse relationship between first and second … volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest …