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Full-Text Articles in Social and Behavioral Sciences
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. …