Embedded Leverage

Andrea Frazzini, Lasse Heje Pedersen

Publikation: Bidrag til tidsskriftTidsskriftartikelpeer review


Many financial instruments are designed with embedded leverage, such as options and leveraged exchange-traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints, and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find empirically that options and leveraged ETFs provide significant amounts of embedded leverage; this embedded leverage increases return volatility in proportion to the embedded leverage; and higher embedded leverage is associated with lower risk-adjusted returns. The results are statistically and economically significant, and we provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics.
TidsskriftThe Review of Asset Pricing Studies
Antal sider65
StatusUdgivet - 27 sep. 2021

Bibliografisk note

Epub ahead of print. Published online: 22 September 2021.