Leverage, moral hazard and liquidity
By: Viral V. Acharya, S. Viswanathan
Contributors: Viswanathan, S.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 15837; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15837.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "We build a model of the financial sector to explain why adverse asset shocks in good economic times lead to a sudden drying up of liquidity.  Financial firms raise short-term debt in order to finance asset purchases.  When asset fundamentals worsen, debt induces firms to risk-shift; this limits their funding liquidity and their ability to roll over debt.  Firms may de-lever by selling assets to better-capitalized firms.  Thus the market liquidity of assets depends on the severity of the asset shock and the system-wide distribution of leverage.  This distribution of leverage is, however, itself endogenous to future prospects.  In particular, short-term debt is relatively cheap to issue in good times when expectations of asset fundamentals are benign, resulting in entry to the financial sector of firms with less capital or high leverage.  Due to such entry, even though the incidence of financial crises is lower in good times, their severity in terms of de-leveraging and evaporation of market liquidity can in fact be greater"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 4/1/2010.

Includes bibliographical references.

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