Why Does Bad News Increase Volatility and Decrease Leverage? /
The literature on leverage until now shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We s...
| المؤلف الرئيسي: | |
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| مؤلفون آخرون: | |
| التنسيق: | دورية |
| اللغة: | English |
| منشور في: |
Washington, D.C. :
International Monetary Fund,
2010.
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| سلاسل: | IMF Working Papers; Working Paper ;
No. 2010/206 |
| الوصول للمادة أونلاين: | Full text available on IMF |
| الملخص: | The literature on leverage until now shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest mostly in technologies that become volatile in bad times. Together with the old literature this explains pro-cyclical leverage. The result also gives rationale to the pattern of volatility smiles observed in the stock options since 1987. Finally, the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium. |
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| وصف المادة: | <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required |
| وصف مادي: | 1 online resource (35 pages) |
| التنسيق: | Mode of access: Internet |
| تدمد: | 1018-5941 |
| وصول: | Electronic access restricted to authorized BRAC University faculty, staff and students |