lecture26

lecture26 -...

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Open Yale Courses ECON 251: Financial Theory Lecture 26 - The Leverage Cycle and Crashes << previous session Overview: In order to understand the precise predictions of the Leverage Cycle theory, in this last class we explicitly solve two mathematical examples of leverage cycles. We show how supply and demand determine leverage as well as the interest rate, and how impatience and volatility play crucial roles in setting the interest rate and the leverage. Mathematically, the model helps us identify the three key elements of a crisis. First, scary bad news increases uncertainty. Second, leverage collapses. Lastly, the most optimistic people get crushed, so the new marginal buyers are far less sanguine about the economy. The result is that the drop in asset prices is
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This note was uploaded on 02/08/2012 for the course ECON 251 taught by Professor Geanakoplos,john during the Fall '09 term at Yale.

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