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Liquidity and leverage

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  • Tobias Adrian
  • Hyun Song Shin

Abstract

In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, prompting financial intermediaries to adjust the size of their balance sheets. We present evidence that marked-to-market leverage is strongly procyclical and argue that such behavior has aggregate consequences. Changes in dealer repurchase agreements (repos) -the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index (VIX). Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.>

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 328.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:328

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Keywords: Business cycles ; Financial markets ; Financial institutions ; Repurchase agreements;

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  1. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2004. "The Cross-Section of Volatility and Expected Returns," NBER Working Papers 10852, National Bureau of Economic Research, Inc.
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  12. Markus K Brunnermeier & Lasse Heje Pederson, 2003. "Predatory Trading," FMG Discussion Papers dp441, Financial Markets Group.
  13. Tobias Adrian & Michael J. Fleming, 2005. "What financing data reveal about dealer leverage," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Mar).
  14. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
  15. Tobias Adrian & Joshua Rosenberg, 2006. "Stock returns and volatility: pricing the short-run and long-run components of market risk," Staff Reports 254, Federal Reserve Bank of New York.
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  20. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
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  22. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  23. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and financial cycles," BIS Working Papers 256, Bank for International Settlements.
  24. Danielsson, Jon & Shin, Hyun Song & Zigrand, Jean-Pierre, 2004. "The impact of risk regulation on price dynamics," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1069-1087, May.
  25. Denis Gromb & Dimitri Vayanos, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," LSE Research Online Documents on Economics 448, London School of Economics and Political Science, LSE Library.
  26. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
  27. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. YELLEN: Monetary Policy Shouldn't Change Because People Are Worried About Financial Stability
    by Rob Wile in Business Insider on 2014-07-02 15:00:00
  2. Chair Janet L. Yellen: Monetary Policy and Financial Stability
    by Guest Author in The Big Picture on 2014-07-03 09:00:18
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