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Leverage as a Predictor for Real Activity and Volatility

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  • Robert Kollmann
  • Stefan Zeugner

Abstract

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.

Suggested Citation

  • Robert Kollmann & Stefan Zeugner, 2011. "Leverage as a Predictor for Real Activity and Volatility," Working Papers ECARES ECARES 2011-009, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/85421
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    Cited by:

    1. Robert Kollmann, 2013. "Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 159-195, December.
    2. Rodrigo Sekkel, 2014. "Balance Sheets of Financial Intermediaries: Do They Forecast Economic Activity?," Staff Working Papers 14-40, Bank of Canada.
    3. Robert Kollmann, 2012. "Global Banks, Financial Shocks and International Business Cycles: Evidence from Estimated Models," 2012 Meeting Papers 840, Society for Economic Dynamics.
    4. Francois Gourio, 2013. "Financial Distress and Endogenous Uncertainty," 2013 Meeting Papers 108, Society for Economic Dynamics.
    5. Kollmann, Robert, 2012. "Global Banks, Fiscal Policy and International Business Cycles," MPRA Paper 69887, University Library of Munich, Germany.
    6. Sekkel, Rodrigo M., 2015. "Balance sheets of financial intermediaries: Do they forecast economic activity?," International Journal of Forecasting, Elsevier, vol. 31(2), pages 263-275.

    More about this item

    Keywords

    Leverage; Financial crisis; Forecasts; Real activity; Volatility;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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