Risk,uncertainty, and leverage |
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Institution: | 1. Department of Economics and Finance, University of South Alabama Mobile, Alabama, 36688, USA;2. Department of Economics, University of Calgary Calgary, Alberta, T2N 1N4, USA |
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Abstract: | Using mostly theoretical models and traditional risk/uncertainty measures (VIX index, panic, precaution, scary bad news, etc.), the current literature tries to clarify the risk/uncertainty-deleveraging pattern. The findings are not sufficient to explain the dynamic empirical relationship between modern risk/uncertainty indicators and leverage. We fill this gap in the literature by using US quarterly data, from 1985:1 to 2018:4, Granger causality tests, and a structural vector autoregression model. We find that commercial bank leverage rises when geopolitical risk and macroeconomic, policy, and equity uncertainty increase. Client-based business relationships of banks and high government borrowing from banks during crises periods are responsible for this relationship. We find that the leverage of broker-dealers and shadow banks declines when Chicago risk and macroeconomic, policy, financial, and equity uncertainty increase. We argue that the vulnerability of broker-dealers and shadow banks to the risk/uncertainty of the entire market system is responsible for this relationship. |
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Keywords: | Leverage Risk Uncertainty Causality Structural VAR E44 E52 G23 |
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