Leverage and Deepening Business Cycle Skewness

Skewness and Leverage

Leverage Restrictions in a Business Cycle Model

We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic e§ects of placing leverage restrictions on financial intermediaries. The financial intermediaries (‘bankers’) in the model must exert e§ort in order to earn high returns for their creditors. An agency problem arises because banker e§ort is not observable to creditors. The consequence of this agency prob...

EGARCH models with fat tails, skewness and leverage

An EGARCH model in which the conditional distribution is heavytailed and skewed is proposed. The properties of the model, including unconditional moments, autocorrelations and the asymptotic distribution of the maximum likelihood estimator, are obtained. Evidence for skewness in conditional t-distribution is found for a range of returns series and the model is shown to give a better fit than th...

Reviewing the Leverage Cycle

We review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices, and create bubbles. We show how leverage can be endogenously determined in equilibrium, and how it depends on volatility. We describe the dynamic feedback properties of leverage, volatility, and asset prices, in what we call the Leverage Cycle...

Firm Risk and Leverage-Based Business Cycles

I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity. Using the micro-estimated dispersion, or “risk,” stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces cyclical movements in both real and financial conditions of the economy. In the model, risk shocks calibrated to micro data lead to...