Where leverage is involved, a small loss is magnified into a big one.
That bigger loss creates considerable indigestion for the losers.
They see what's happening and rush to deleverage; that is, to sell assets to reduce exposure to volatility.
That rush to the exits creates more volatility.
The cycle continues.
This deleveraging cycle goes a long way to explain the 2008 financial crisis: the volatility that created it and that it created.
When we look at the causes and consequences of volatility, we can see how it frequently can become a self-fulfilling prophecy, particularly where leverage is involved.
That bigger loss creates considerable indigestion for the losers.
They see what's happening and rush to deleverage; that is, to sell assets to reduce exposure to volatility.
That rush to the exits creates more volatility.
The cycle continues.
This deleveraging cycle goes a long way to explain the 2008 financial crisis: the volatility that created it and that it created.
When we look at the causes and consequences of volatility, we can see how it frequently can become a self-fulfilling prophecy, particularly where leverage is involved.
No comments:
Post a Comment