Mayerhofer_2019_Limits.pdf (788.81 kB)
The limits of leverage
journal contribution
posted on 2020-06-08, 11:39 authored by Paolo Guasoni, EBERHARD MAYERHOFEREBERHARD MAYERHOFERWhen trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment opportunities and proportional costs, we find strategies that maximize long‐term returns given average volatility. As leverage increases, rising rebalancing costs imply declining Sharpe ratios. Beyond a critical level, even returns decline. Holding the Sharpe ratio constant, higher asset volatility leads to superior returns through lower costs.
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Mathematical Finance;29 (1), pp. 249-284Publisher
Wiley and Sons LtdNote
peer-reviewedRights
This is the peer reviewed author version of the following article:Guasoni, P;Mayerhofer, E (2019) 'The limits of leverage'. Mathematical Finance, 29 :249-284., which has been published in final form at https://doi.org/10.1111/mafi.12172 This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. http://olabout.wiley.com/WileyCDA/Section/id-828039.html#termsLanguage
EnglishExternal identifier
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