A Leverage-Based Measure of Financial Stability

Tobias Adrian, Alexander Tepper and Karol Borowiecki

No 12676, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.

Keywords: Leverage; Financial crisis; Financial stability; Minimum market size for stability; Minmass; Stability ratio; Long-term capital management; Ltcm (search for similar items in EconPapers)
JEL-codes: G01 G10 G20 G21 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-ban
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Related works:
Journal Article: A leverage-based measure of financial stability (2022)
Working Paper: A Leverage-Based Measure of Financial Stability (2021)
Working Paper: A Leverage-Based Measure of Financial Stability (2018)
Working Paper: A Leverage-Based Measure of Financial Instability (2014)
Working Paper: A Leverage-Based Measure of Financial Instability (2014)
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