NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Procyclical Leverage and Value-at-Risk

Tobias Adrian, Hyun Song Shin

NBER Working Paper No. 18943
Issued in April 2013
NBER Program(s):Corporate Finance, Monetary Economics

The availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries. Empirically, we find that intermediary leverage is negatively aligned with the banks' Value-at-Risk (VaR). Motivated by the evidence, we explore a contracting model that captures the observed features. Under general conditions on the outcome distribution given by Extreme Value Theory (EVT), intermediaries maintain a constant probability of default to shifts in the outcome distribution, implying substantial deleveraging during downturns. For some parameter values, we can solve the model explicitly, thereby endogenizing the VaR threshold probability from the contracting problem.

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Document Object Identifier (DOI): 10.3386/w18943

Published: Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403. citation courtesy of

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