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Leverage and Financial Instability

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  • A. Smirnov.
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    Abstract

    In the paper some prominent features of a modern financial system are studied using the model of leverage dynamics. Asset securitization is considered as a major factor increasing aggregate debt and hence system’s uncertainty and instability. A simple macrofinancial model includes a logistic equation of leverage dynamics that reveals origins of a financial bubble, thus corresponding closely to the Minsky "financial instability hypothesis". Using ROA, ROE, and the interest rate as parameters, the model provides wide spectrum of leverage and default probability trajectories for the short and long run.

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    Bibliographic Info

    Article provided by N.P. Redaktsiya zhurnala "Voprosy Economiki" in its journal Voprosy Economiki.

    Volume (Year): 9 (2012)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:nos:voprec:2012-09-2

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    Web page: http://www.vopreco.ru/eng/year.html

    Related research

    Keywords: securitization; leverage; probability of default; financial bubble; financial instability.;

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