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|z 9781455205370
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|a 1018-5941
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|a Fostel, Ana.
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|a Why Does Bad News Increase Volatility and Decrease Leverage? /
|c Ana Fostel, John Geanakoplos.
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|a Washington, D.C. :
|b International Monetary Fund,
|c 2010.
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|a 1 online resource (35 pages)
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|a IMF Working Papers
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|a <strong>Off-Campus Access:</strong> No User ID or Password Required
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|a <strong>On-Campus Access:</strong> No User ID or Password Required
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|a Electronic access restricted to authorized BRAC University faculty, staff and students
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|a 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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|a Mode of access: Internet
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|a Geanakoplos, John.
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|a IMF Working Papers; Working Paper ;
|v No. 2010/206
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| 856 |
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|z Full text available on IMF
|u http://elibrary.imf.org/view/journals/001/2010/206/001.2010.issue-206-en.xml
|z IMF e-Library
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