A Leverage-Based Measure of Financial Stability

40 Pages Posted: 5 Feb 2018 Last revised: 7 Sep 2020

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Karol Borowiecki

University of Southern Denmark

Alexande Tepper

Columbia University - Graduate School of Architecture, Planning and Preservation

Multiple version iconThere are 3 versions of this paper

Date Written: February 2018

Abstract

The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.

Keywords: financial crisis, Financial Stability, leverage, Long-Term Capital Management, LTCM, minimum market size for stability, MinMaSS, stability ratio

JEL Classification: G01, G10, G20, G21

Suggested Citation

Adrian, Tobias and Borowiecki, Karol and Tepper, Alexander, A Leverage-Based Measure of Financial Stability (February 2018). CEPR Discussion Paper No. DP12676, Available at SSRN: https://ssrn.com/abstract=3118324

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

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

HOME PAGE: http://www.tobiasadrian.com

Karol Borowiecki

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Alexander Tepper

Columbia University - Graduate School of Architecture, Planning and Preservation ( email )

New York, NY
United States

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