Download now Free registration required
Financial crises are often accompanied by a flight-from-leverage as levered investors realize that they are overextended in a distressed market and try to reduce their funding risk. The author studies an equilibrium model in which assets can become severely distressed as investors learn that an adverse event has occurred, but don't initially know the full extent of the damage. When distress occurs, flight-from leverage results in a major contraction in the size of the riskless debt market. Thus, the supply of riskless assets shrinks precisely when agents have the greatest incentives to increase their bondholdings.
- Format: PDF
- Size: 138.8 KB