Leverage Bubbles

Abstract

This paper investigates the relation between liquidity and asset prices. It shows that, when banks balance sheets are marked to market and banks are targeting a financial leverage level - a situation similar to current environment - formation of Leverage Bubble phenomenon and suggests a new regulation rule based on a Dynamic Leverage Ratio (DLR) rule.Financial crises, rational bubbles, Dynamic Leverage Ratio, mark to market accounting, asset pricing, macroprudential regulation, market liquidity.