Procyclical Leverage and Value-at-Risk
AbstractThe availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks' Value-at-Risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18943.
Date of creation: Apr 2013
Date of revision:
Note: CF ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-13 (All new papers)
- NEP-BAN-2013-04-13 (Banking)
- NEP-RMG-2013-04-13 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chiesa, Gabriella, 2001.
"Incentive-Based Lending Capacity, Competition and Regulation in Banking,"
Journal of Financial Intermediation,
Elsevier, vol. 10(1), pages 28-53, January.
- Gabriella Chiesa, . "Incentive-based Lending Capacity, Competition and Regulation in Banking," Working Papers 92, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Gorton, Gary & Metrick, Andrew, 2012.
"Securitized banking and the run on repo,"
Journal of Financial Economics,
Elsevier, vol. 104(3), pages 425-451.
- Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
- Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Tommaso Trani, 2011. "Trade in secured debt, adjustment in haircuts and international portfolios," IHEID Working Papers 13-2011, Economics Section, The Graduate Institute of International Studies.
- Bank for International Settlements, 2011. "Global liquidity - concept, measurement and policy implications," CGFS Papers, Bank for International Settlements, number 45, January.
- Hyun Song Shin, 2011. "Comment on "Risk Topography"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 184-189 National Bureau of Economic Research, Inc.
- Dietrich Domanski & Ingo Fender & Patrick McGuire, 2011. "Assessing global liquidity," BIS Quarterly Review, Bank for International Settlements, December.
- de la Torre, Augusto & Ize, Alain, 2013. "The foundations of macroprudential regulation : a conceptual roadmap," Policy Research Working Paper Series 6575, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.