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Full-Text Articles in Economics
Solving The Present Crisis And Managing The Leverage Cycle, John Geanakoplos
Solving The Present Crisis And Managing The Leverage Cycle, John Geanakoplos
Cowles Foundation Discussion Papers
The present crisis is the bottom of a recurring problem that I call the leverage cycle, in which leverage gradually rises too high then suddenly falls much too low. The government must manage the leverage cycle in normal times by monitoring and regulating leverage to keep it from getting too high. In the crisis stage the government must stem the scary bad news that brought on the crisis, which often will entail coordinated write downs of principal; it must restore sane leverage by going around the banks and lending at lower collateral rates (not lower interest rates), and when necessary …
Leverage Causes Fat Tails And Clustered Volatility, Stefan Thurner, J. Doyne Farmer, John Geanakoplos
Leverage Causes Fat Tails And Clustered Volatility, Stefan Thurner, J. Doyne Farmer, John Geanakoplos
Cowles Foundation Discussion Papers
We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called “value investing,” i.e. systematically attempting to buy underpriced assets. When funds do not borrow, the price fluctuations of the asset are normally distributed and uncorrelated across time. All this changes when the funds are allowed to leverage, i. e. borrow from a bank, to purchase more assets than their wealth would otherwise permit. During good times competition drives investors to funds that use more leverage, because they have higher profits. As leverage increases price fluctuations become …
Leverage Causes Fat Tails And Clustered Volatility, Stefan Thurner, J. Doyne Farmer, John Geanakoplos
Leverage Causes Fat Tails And Clustered Volatility, Stefan Thurner, J. Doyne Farmer, John Geanakoplos
Cowles Foundation Discussion Papers
We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called “value investing,” i.e., systematically attempting to buy underpriced assets. When funds do not borrow, the price fluctuations of the asset are approximately normally distributed and uncorrelated across time. This changes when the funds are allowed to leverage, i.e., borrow from a bank, which allows them to purchase more assets than their wealth would otherwise permit. During good times funds that use more leverage have higher profits, increasing their wealth and making them dominant in the market. …