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Liquidity and financial cycles

In a financial system where balance sheets are continuously marked to market, asset price changes show up immediately in changes in net worth, and elicit responses from financial intermediaries, who adjust the size of their balance sheets. We document evidence that marked to market leverage is strongly procyclical. Such behaviour has aggregate consequences. Changes in aggregate balance sheets for intermediaries forecast changes in risk appetite in...

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Year of publication:	2008-07-01
Authors:	Adrian, Tobias ; Shin, Hyun Song
Institutions:	Bank für Internationalen Zahlungsausgleich <Basel>
Subject:	Leverage-Effekt \| Wirtschaftskreislauf \| business cycle \| Eigenkapital \| Finanzintermediation

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1. Introduction
2. Some basic balance sheet arithmetic
3. Evidence from investment bank balance sheets
4. Value-at-risk
5. Forecasting risk appetite
6. Related literature
7. Concluding remarks on aggregate liquidit

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