Procyclical leverage and value-at-risk

Tobias Adrian and Hyun Song Shin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks’ value-at-risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.

Keywords: financial intermediary leverage; procyclicality; collateralized borrowing (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-09-05
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

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http://eprints.lse.ac.uk/60972/ Open access version. (application/pdf)

Related works:
Journal Article: Procyclical Leverage and Value-at-Risk (2014)
Working Paper: Procyclical Leverage and Value-at-Risk (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:60972

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