IMF on why bad news increases volatility, decreases leverage
Research published by the IMF in September suggests a reason why bad news is more often than not associated with higher future volatility.
The research notes that the literature on leverage until now shows only how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage the literature assumes that bad news increases volatility.
The research published by the IMF shows that, in a model with endogenous leverage and heterogeneous beliefs, agents have the
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