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A Leverage-Based Measure of Financial Stability

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  • Adrian, Tobias
  • Borowiecki, Karol Jan
  • Tepper, Alexander

Abstract

The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.

Suggested Citation

  • Adrian, Tobias & Borowiecki, Karol Jan & Tepper, Alexander, 2018. "A Leverage-Based Measure of Financial Stability," CEPR Discussion Papers 12676, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12676
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    References listed on IDEAS

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    Cited by:

    1. Jan K. Solarz, 2015. "Systemic Risk Management. Cognitive Perspective (Zarzadzanie ryzykiem systemu finansowego. Perspektywa poznawcza)," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(55), pages 30-46.

    More about this item

    Keywords

    financial crisis; Financial Stability; leverage; Long-Term Capital Management; LTCM; minimum market size for stability; MinMaSS; stability ratio;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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