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Leverage as a Predictor for Real Activity and Volatility

  • Robert Kollmann
  • Stefan Zeugner

This paper explores the link between the leverage of the US financial sector, of households and non-financial businesses, and real activity. We document that leverage is negatively correlated with the future growth of real activity, and positively linked to the conditional volatility of future real activity and of equity returns. The joint information in sectoral leverage series is more relevant for predicting future real activity than the information contained in any individual leverage series. Using in-sample regressions and out-of sample forecasts, we show that the predictive power of leverage is roughly comparable to that of macro and financial variables commonly used by forecasters. Leverage information would not have allowed to predict thr "Great Recession" of 2008-2009 any better than macro/financial predictors.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2011-009.

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Length: 30 p.
Date of creation: Apr 2011
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2013/85421
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