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Dr Pedro Saffi

Pedro Saffi

Title of research: Deleveraging Risk

Deleveraging risk is the risk attributable to investing in a security held by levered investors. When there is an aggregate negative shock to the availability of funding capital, securities with a greater presence of levered investors experience extreme return realizations as these investors unwind their positions. Using data on equity loans as a proxy for the degree of levered positions in a given stock, we find robust evidence of deleveraging risk. Stocks with a high degree of levered investors experience large positive returns and a decrease in short selling activity around periods of funding capital scarcity.