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Title:Liquidity and leverage PDF Logo
Authors:Adrian, Tobias
Shin, Hyun Song
Issue Date:2008
Series/Report no.:Staff Report, Federal Reserve Bank of New York 328
Abstract:In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, eliciting responses from financial intermediaries who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos - the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index (VIX). Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.
Subjects:Financial market liquidity
financial cycles
financial intermediary leverage
JEL:E32
E44
G10
G20
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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