Procyclical Leverage and Value-at-Risk

Tobias Adrian and Hyun Song Shin

No 18943, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: CF ME
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Citations: View citations in EconPapers (87)

Published as Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.

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Journal Article: Procyclical Leverage and Value-at-Risk (2014)
Working Paper: Procyclical leverage and value-at-risk (2013)
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