The Leverage Cycle and Crashes - Financial Theory Lecture 26

Explore the intricacies of the Leverage Cycle theory in this comprehensive lecture from Yale University's Financial Theory course. Delve into mathematical examples that illustrate how supply and demand determine leverage and interest rates, while examining the crucial roles of impatience and volatility. Identify the three key elements of a financial crisis: increased uncertainty due to bad news, collapse of leverage, and the impact on optimistic market participants. Learn how these factors amplify asset price drops beyond initial expectations. Discover potential strategies for mitigating crisis fallout and preventing leverage cycle crashes through monitoring and regulation. The lecture covers introduction to leverage, supply and demand effects, factors influencing leverage settings, the mechanics of leverage cycle crashes, and the possibility of leverage monitoring.

- Chapter 1. Introduction
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- Chapter 2. Understanding Leverage
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- Chapter 3. Supply and Demand Effects on Interest Rates and Leverage
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- Chapter 4. Impatience and Volatility on Setting Leverage
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- Chapter 5. Bad News, Pessimism, Price Drops, and Leverage Cycle Crashes
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- Chapter 6. Can Leverage Be Monitored?
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