AbstractThis paper investigates the relation between liquidity and asset prices. It shows that, when banks balance sheets are marked to market and banks are targeting a financial leverage level - a situation similar to current environment - formation of Leverage Bubble phenomenon and suggests a new regulation rule based on a Dynamic Leverage Ratio (DLR) rule.
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Date of creation: May 2009
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Financial crises; rational bubbles; Dynamic Leverage Ratio; mark to market accounting; asset pricing; macroprudential regulation; market liquidity.;
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-08-02 (Accounting & Auditing)
- NEP-ALL-2009-08-02 (All new papers)
- NEP-BAN-2009-08-02 (Banking)
- NEP-FMK-2009-08-02 (Financial Markets)
- NEP-REG-2009-08-02 (Regulation)
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