Leverage leverage may also be constrained for any of

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Unformatted text preview: s uncertainty averse, averse, or more optimistic about returns on the particular assets. Leverage Leverage may also be constrained for any of a variety of reasons. The recent literature has emphasized two broad types of constraints. On one hand, there may be a limit on the size of the losses that the intermediary would be subject to in bad bad states of the world, relative to its capital; such limits may result from regulatory tory capital requirements, or (the case of greatest relevance in the recent crisis) such limits may be imposed by the intermediary’s creditors, who are unwilling to supply additional funding if the leverage constraint is exceeded (as in Zigrand, Shin, and Danielsson, 2010; Adrian, Moench, and Shin, 2010b; Adrian and Shin, forthcoming forthcoming b; Beaudry and Lahiri, 2010).6 Alternatively, Alternatively, intermediaries may raise funds by pledging particular assets as collateral for individual loans, and the amount that they can borrow may be limited by the value of available collateral. Gârleanu and Pedersen (2010) and Ashcraft, Gârleanu, and Pedersen (forthcoming) consider the consequences of collateral constraints in a model where the fraction of each asset’s value that...
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