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Monitoring Leverage

We discuss how leverage can be monitored for institutions, individuals, and assets. While traditionally the interest rate has been regarded as the important feature of a loan, we argue that leverage is sometimes even more important. Monitoring leverage provides information about how risk builds up during booms as leverage rises and how crises start when leverage on new loans sharply declines. Leverage data is also a crucial input for crisis management and lending facilities. Leverage at the asset level can be monitored by down payments or margin requirement or and haircuts, giving a model-free measure that can be observed directly, in contrast to other measures of systemic risk that require complex estimation. Asset leverage is a fundamental measure of systemic risk and so is important in itself, but it is also the building block out of which measures of institutional leverage and household leverage can be most accurately and informatively constructed.

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File URL: http://cowles.econ.yale.edu/P/cd/d18a/d1838.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1838.

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Length: 18 pages
Date of creation: Dec 2011
Date of revision:
Publication status: Published in Markus K. Brunnermeier and Arvind Krishnamurthy, eds., Risk Topography: Systemic Risk and Macro Modeling, NBER, 2014, pp. 175-182
Handle: RePEc:cwl:cwldpp:1838
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Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Andrea Frazzini & Lasse H. Pedersen, 2010. "Betting Against Beta," NBER Working Papers 16601, National Bureau of Economic Research, Inc.
  2. Andrea Frazzini & Lasse H. Pedersen, 2012. "Embedded Leverage," NBER Working Papers 18558, National Bureau of Economic Research, Inc.
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