Minsky, Options and Subprime

Abstract:     
The Financial Instability Hypothesis-FIH (Minsky, 1977) explains the endogenous creation of the business cycle by considering how the economic units contribute to the capital development, and the debt impact. The FIH is a powerful model to describe how financial markets become unstable, also in the absence of an exogenous shock. We consider the availability of hedging tools for firms, (i.e. options), which should positively influence their cash and interest payments (i.e. savings). First empirical evidence on the American economy shows that the hypotheses put forward can be satisfied over tranquil periods of financial markets. On the contrary, if markets become unstable, derivatives contribute to instability and the only solution is the one put forward originally by Minsky: the Government intervention.

Number of Pages in PDF File: 20

Keywords: Minsky, Financial Instability Hypothesis, Options, Hedge-Hedging, Subprime Financial Crisis, Government Intervention

JEL Classification: E12, E32, G1

working papers series