Risk, Uncertainty, and Leverage

63 Pages Posted: 1 Jul 2020

See all articles by Khandokar Istiak

Khandokar Istiak

University of South Alabama - Mitchell College of Business - Department of Economics and Finance

Date Written: June 7, 2020


Using mostly theoretical models and traditional risk/uncertainty measures (VIX index, panic, precaution, scary bad news, etc.), the current literature tries to clarify the risk/uncertainty-deleveraging pattern. The findings are not sufficient to explain the dynamic empirical relationship between modern risk/uncertainty indicators and leverage. We fill this gap in the literature by using US quarterly data, from 1985:1 to 2018:4, Granger causality tests, and a structural vector autoregression model. We find that commercial bank leverage rises when geopolitical risk and macroeconomic, policy, and equity uncertainty increase. Client-based business relationships of banks and high government borrowing from banks during crises periods are responsible for this relationship. We find that the leverage of broker-dealers and shadow banks declines when Chicago risk and macroeconomic, policy, financial, and equity uncertainty increase. We argue that the vulnerability of broker-dealers and shadow banks to the risk/uncertainty of the entire market system is responsible for this relationship.

Keywords: Leverage, Risk, Uncertainty, Causality, Structural VAR

JEL Classification: E44, E52, G23

Suggested Citation

Istiak, Khandokar, Risk, Uncertainty, and Leverage (June 7, 2020). Economic Modelling, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3621513

Khandokar Istiak (Contact Author)

University of South Alabama - Mitchell College of Business - Department of Economics and Finance ( email )

College of Business and Management Studies
Mobile, AL 36688
United States

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