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A Leverage-Based Measure of Financial Stability

Tobias Adrian (), Karol Borowiecki () and Alexander Tepper ()
Additional contact information
Tobias Adrian: Monetary and Capital Markets Department, Postal: International Monetary Fund
Alexander Tepper: Columbia University, Postal: U.S.A.

No 3/2021, Discussion Papers of Business and Economics from University of Southern Denmark, Department of Business and Economics

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)
Pages: 37 pages
Date: 2021-02-17
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cwa, nep-fdg, nep-ifn, nep-ore and nep-rmg
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Related works:
Working Paper: A Leverage-Based Measure of Financial Stability (2018) Downloads
Working Paper: A Leverage-Based Measure of Financial Stability (2018) Downloads
Working Paper: A Leverage-Based Measure of Financial Instability (2014) Downloads
Working Paper: A Leverage-Based Measure of Financial Instability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sdueko:2021_003

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