IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v29y2018i2d10.1007_s11079-017-9448-x.html
   My bibliography  Save this article

Broker-dealer Leverage and the Stock Market

Author

Listed:
  • Apostolos Serletis

    (University of Calgary)

  • Khandokar Istiak

    (University of South Alabama)

Abstract

This paper employs linear and nonlinear causality tests to examine (for the first time) the dynamic relation between broker-dealer leverage and the stock market in the United States, using quarterly data since 1967. We find significant linear causality from the stock market to broker-dealer leverage and a nonlinear feedback from broker-dealer leverage to the stock market, supporting the view that the macro economy is highly nonlinear. This bidirectional causality shows that a stock market crash might happen long before a fall in fundamental asset values.

Suggested Citation

  • Apostolos Serletis & Khandokar Istiak, 2018. "Broker-dealer Leverage and the Stock Market," Open Economies Review, Springer, vol. 29(2), pages 215-222, April.
    • Handle: RePEc:kap:openec:v:29:y:2018:i:2:d:10.1007_s11079-017-9448-x
    DOI: 10.1007/s11079-017-9448-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11079-017-9448-x
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11079-017-9448-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Istiak, Khandokar & Serletis, Apostolos, 2016. "A Note On Leverage And The Macroeconomy," Macroeconomic Dynamics, Cambridge University Press, vol. 20(1), pages 429-445, January.
    2. Barnett, William A. & Serletis, Apostolos & Serletis, Demitre, 2015. "Nonlinear And Complex Dynamics In Economics," Macroeconomic Dynamics, Cambridge University Press, vol. 19(8), pages 1749-1779, December.
    3. Khandokar Istiak & Apostolos Serletis, 2017. "Monetary policy and leverage shocks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 115-128, April.
    4. Apostolos Serletis & Khandokar Istiak & Periklis Gogas, 2013. "Interest Rates, Leverage, and Money," Open Economies Review, Springer, vol. 24(1), pages 51-78, February.
    5. Frederic S. Mishkin, 2011. "Monetary Policy Strategy: Lessons from the Crisis," NBER Working Papers 16755, National Bureau of Economic Research, Inc.
    6. √Íscar Jord√Ä & Moritz Schularick & Alan M. Taylor, 2013. "When Credit Bites Back," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 3-28, December.
    7. Tobias Adrian & Erkko Etula & Tyler Muir, 2014. "Financial Intermediaries and the Cross-Section of Asset Returns," Journal of Finance, American Finance Association, vol. 69(6), pages 2557-2596, December.
    8. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    9. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
    10. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-1244, September.
    11. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    12. Serletis, Apostolos & Istiak, Khandokar, 2017. "Financial intermediary leverage spillovers," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 1000-1007.
    13. Diks Cees & Panchenko Valentyn, 2005. "A Note on the Hiemstra-Jones Test for Granger Non-causality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-9, June.
    14. Diks, Cees & Panchenko, Valentyn, 2006. "A new statistic and practical guidelines for nonparametric Granger causality testing," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1647-1669.
    15. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    16. Hiemstra, Craig & Jones, Jonathan D, 1994. "Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-1664, December.
    17. Evanoff, Douglas D. & Kaufman, George G. & Malliaris, A. G. (ed.), 2012. "New Perspectives on Asset Price Bubbles," OUP Catalogue, Oxford University Press, number 9780199844333.
    18. John Geanakoplos, 2010. "Solving the present crisis and managing the leverage cycle," Economic Policy Review, Federal Reserve Bank of New York, vol. 16(Aug), pages 101-131.
    19. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    20. John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65, National Bureau of Economic Research, Inc.
    21. John Geanakoplos, 2010. "Solving the Present Crisis and Managing the Leverage Cycle," Cowles Foundation Discussion Papers 1751, Cowles Foundation for Research in Economics, Yale University.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Istiak, Khandokar & Serletis, Apostolos, 2020. "Risk, uncertainty, and leverage," Economic Modelling, Elsevier, vol. 91(C), pages 257-273.
    2. M. Iqbal Ahmed & Quazi Fidia Farah, 2021. "Adjustment dynamics between broker–dealer leverage and stock market: a threshold cointegration analysis," Empirical Economics, Springer, vol. 61(1), pages 121-144, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Istiak, Khandokar & Serletis, Apostolos, 2020. "Risk, uncertainty, and leverage," Economic Modelling, Elsevier, vol. 91(C), pages 257-273.
    2. M. Iqbal Ahmed & Quazi Fidia Farah, 2021. "Adjustment dynamics between broker–dealer leverage and stock market: a threshold cointegration analysis," Empirical Economics, Springer, vol. 61(1), pages 121-144, July.
    3. Galo Nuño & Carlos Thomas, 2017. "Bank Leverage Cycles," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 32-72, April.
    4. Fostel, Ana & Geanakoplos, John, 2012. "Why does bad news increase volatility and decrease leverage?," Journal of Economic Theory, Elsevier, vol. 147(2), pages 501-525.
    5. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
    6. Serletis, Apostolos & Istiak, Khandokar, 2017. "Financial intermediary leverage spillovers," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 1000-1007.
    7. Poledna, Sebastian & Bochmann, Olaf & Thurner, Stefan, 2017. "Basel III capital surcharges for G-SIBs are far less effective in managing systemic risk in comparison to network-based, systemic risk-dependent financial transaction taxes," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 230-246.
    8. Wang, F. Albert, 2022. "Double leverage cycle, interest rate, and financial crisis," Journal of Financial Stability, Elsevier, vol. 58(C).
    9. Istiak, Khandokar, 2019. "The nature of shadow bank leverage shocks on the macroeconomy," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    10. John Geanakoplos, 2013. "Leverage, default, and forgiveness: lessons from the American and European crises," Special Conference Papers 27, Bank of Greece.
    11. Schoenmaker, Dirk & Wierts, Peter, 2015. "Regulating the financial cycle: An integrated approach with a leverage ratio," Economics Letters, Elsevier, vol. 136(C), pages 70-72.
    12. Fabio Caccioli & Jean-Philippe Bouchaud & J. Doyne Farmer, 2012. "A proposal for impact-adjusted valuation: Critical leverage and execution risk," Papers 1204.0922, arXiv.org, revised Aug 2012.
    13. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    14. Aymanns, Christoph & Caccioli, Fabio & Farmer, J. Doyne & Tan, Vincent W.C., 2016. "Taming the Basel leverage cycle," Journal of Financial Stability, Elsevier, vol. 27(C), pages 263-277.
    15. Poledna, Sebastian & Molina-Borboa, José Luis & Martínez-Jaramillo, Serafín & van der Leij, Marco & Thurner, Stefan, 2015. "The multi-layer network nature of systemic risk and its implications for the costs of financial crises," Journal of Financial Stability, Elsevier, vol. 20(C), pages 70-81.
    16. Daskalaki, Charoula & Skiadopoulos, George, 2016. "The effects of margin changes on commodity futures markets," Journal of Financial Stability, Elsevier, vol. 22(C), pages 129-152.
    17. Hatem Salah & Marwa Souissi, 2016. "Financial Stability and Macro Prudential Regulation: Policy Implication of Systemic Expected Shortfall Measure," Working Papers 985, Economic Research Forum, revised Apr 2016.
    18. Dewally, Michaël & Shao, Yingying, 2013. "Leverage, wholesale funding and national risk attitude," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 179-195.
    19. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2013. "Dynamic Leverage Asset Pricing," Staff Reports 625, Federal Reserve Bank of New York.
    20. , 2016. "Funding Illiquidity," Working Papers on Finance 1601, University of St. Gallen, School of Finance, revised Sep 2019.

    More about this item

    Keywords

    Broker-dealer leverage; Nonlinear causality; Nonlinearities;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:29:y:2018:i:2:d:10.1007_s11079-017-9448-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.