Procyclical Leverage and Value-at-Risk
43 Pages Posted: 5 Apr 2013 Last revised: 6 Apr 2023
Date Written: April 2013
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.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Money, Liquidity, and Monetary Policy
By Tobias Adrian and Hyun Song Shin
-
Financial Intermediaries, Financial Stability, and Monetary Policy
By Tobias Adrian and Hyun Song Shin
-
Financial Intermediaries and Monetary Economics
By Tobias Adrian and Hyun Song Shin
-
Monetary Policy, Financial Conditions, and Financial Stability
By Tobias Adrian and Nellie Liang
-
Risk Appetite and Exchange Rates
By Tobias Adrian, Erkko Etula, ...
-
Financial Intermediation, Asset Prices and Macroeconomic Dynamics
By Tobias Adrian, Emanuel Moench, ...
-
Macro Risk Premium and Intermediary Balance Sheet Quantities
By Tobias Adrian, Emanuel Moench, ...
-
Monetary Tightening Cycles and the Predictability of Economic Activity
By Arturo Estrella and Tobias Adrian
-
Prices and Quantities in the Monetary Policy Transmission Mechanism
By Tobias Adrian and Hyun Song Shin