Liquidity and Leverage

39 Pages Posted: 4 Jun 2008 Last revised: 11 Nov 2010

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: January 1, 2009


In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, eliciting responses from financial intermediaries who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos—the primary margin of adjustment for the aggregate balance sheets of intermediaries—forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index (VIX). Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.

Keywords: financial market liquidity, financial cycles, financial intermediary leverage

JEL Classification: E32, E44, G10, G20

Suggested Citation

Adrian, Tobias and Shin, Hyun Song, Liquidity and Leverage (January 1, 2009). FRB of New York Staff Report No. 328, Available at SSRN: or

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002


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