arXiv · arXiv q-fin · 2026
Fundamental-value anchoring of resting liquidity is a causal stabiliser of an order-book market: while the anchor holds, even a heavily leveraged book stays quiet. We take that anchor strength as a continuous control and characterise the endogenous liquidity crises that appear once it is nearly removed. In a single continuous-double-auction market driven by anchored noise traders, chartist herders, a population of fu…
Jan Novotny
arXiv · arXiv q-fin · 2024
Concentrated liquidity (CL) provisioning is a way how to improve the capital efficiency of Automated Market Makers (AMM). Allowing liquidity providers to use leverage is a step towards even higher capital efficiency. A number of Decentralized Finance (DeFi) protocols implement this technique in conjunction with overcollateralized lending. However, the properties of leveraged CL positions have not been formalized and …
Atis Elsts, Krešimir Klas
arXiv · arXiv q-fin · 2026
A physically backed leveraged event position requires real credit: if collateral C receives leverage L, the protocol supplies (L-1)C and uses the combined amount to acquire recognized event exposure. This paper develops a venue-agnostic on-chain credit architecture for that capital layer and an endogenous model of its capital market. It separates traders, Senior Credit LPs, market makers, liquidators, and Liquidation…
Maksym Nechepurenko
arXiv · arXiv q-fin · 2026
Leverage does not create manipulation or informed trading in event markets, but it changes their economics. We separate four conduct channels: market-price manipulation, real-world outcome manipulation, resolution-process manipulation, and informed trading that exploits non-public information without changing the event or resolution rule. A capital-constrained amplification model shows that gross directional gains sc…
Maksym Nechepurenko
arXiv · arXiv q-fin · 2020
A leveraged ETF is a fund aimed at achieving a rate of return several times greater than that of the underlying asset such as Nikkei 225 futures. Recently, it has been suggested that rebalancing trades of a leveraged ETF may destabilize the financial markets. An empirical study using an agent-based simulation indicated that a rebalancing trade strategy could affect the price formation of an underlying asset market. H…
Isao Yagi, Shunya Maruyama, Takanobu Mizuta
OpenAlex · The Journal of Finance · 2001 · cites 824
ABSTRACT Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean‐reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low‐leverage firms, and …
Pierre Collin‐Dufresne, Robert S. Goldstein
arXiv · arXiv · 2026
Leveraged ETFs (L-ETFs) are exchange-traded funds that achieve price movements several times greater than an index by holding index-linked futures such as Nikkei Stock Average Index futures. It is known that when the price of an L-ETF falls, the L-ETF uses the liquidity of futures to limit the decline through arbitrage trading. Conversely, when the price of a futures contract falls, the futures contract uses the liqu…
Ryuki Hayase, Takanobu Mizuta, Isao Yagi
arXiv · arXiv · 2010
Leverage is strongly related to liquidity in a market and lack of liquidity is considered a cause and/or consequence of the recent financial crisis. A repurchase agreement is a financial instrument where a security is sold simultaneously with an agreement to buy it back at a later date. Repurchase agreements (repos) market size is a very important element in calculating the overall leverage in a financial market. The…
Wanfeng Yan, Ryan Woodard, Didier Sornette
arXiv · arXiv · 2026
Leveraged event positions combine a repayable loan with an outcome claim that may become non-tradable before oracle payout is final. This paper specifies Axient, a physically backed margin layer for binary event markets that separates leverage maturity from claim maturity and makes the hard-flat decision under explicit execution uncertainty. The model distinguishes quoted book proceeds, matched proceeds, settled proc…
Maksym Nechepurenko
arXiv · arXiv · 2016
We show that typical behaviors of market participants at the high frequency scale generate leverage effect and rough volatility. To do so, we build a simple microscopic model for the price of an asset based on Hawkes processes. We encode in this model some of the main features of market microstructure in the context of high frequency trading: high degree of endogeneity of market, no-arbitrage property, buying/selling…
El Euch Omar, Fukasawa Masaaki, Rosenbaum Mathieu
arXiv · arXiv · 2022
We present a general equilibrium macro-finance model with a positive feedback loop between capital investment and land price. As leverage is relaxed beyond a critical value, through the financial accelerator, a phase transition occurs from balanced growth where land prices reflect fundamentals (present value of rents) to unbalanced growth where land prices grow faster than rents, generating land price bubbles. Unbala…
Tomohiro Hirano, Ryo Jinnai, Alexis Akira Toda
arXiv · arXiv · 2017
In this paper we develop a statistical arbitrage trading strategy with two key elements in hi-frequency trading: stop-loss and leverage. We consider, as in Bertram (2009), a mean-reverting process for the security price with proportional transaction costs; we show how to introduce stop-loss and leverage in an optimal trading strategy. We focus on repeated strategies using a self-financing portfolio. For every given s…
Roberto Baviera, Tommaso Santagostino Baldi
arXiv · arXiv · 2017
A leveraged exchange traded fund (LETF) is an exchange traded fund that uses financial derivatives to amplify the price changes of a basket of goods. In this paper, we consider the robust hedging of European options on a LETF, finding model-free bounds on the price of these options. To obtain an upper bound, we establish a new optimal solution to the Skorokhod embedding problem (SEP) using methods introduced in Beigl…
Alexander M. G. Cox, Sam M. Kinsley
arXiv · arXiv · 2016
Commodity exchange-traded funds (ETFs) are a significant part of the rapidly growing ETF market. They have become popular in recent years as they provide investors access to a great variety of commodities, ranging from precious metals to building materials, and from oil and gas to agricultural products. In this article, we analyze the tracking performance of commodity leveraged ETFs and discuss the associated trading…
Kevin Guo, Tim Leung
arXiv · arXiv · 2016
The leverage effect refers to the well-established relationship between returns and volatility. When returns fall, volatility increases. We examine the role of the leverage effect with regards to generating density forecasts of equity returns using well-known observation and parameter-driven volatility models. These models differ in their assumptions regarding: The parametric specification, the evolution of the condi…
Leopoldo Catania, Nima Nonejad
arXiv · arXiv · 2015
There are some statistical anomalies in the Chinese stock market, i.e., positive return skewness, anti-leverage effect (positive returns induce higher volatility than negative returns); and reverse volatility asymmetry (contemporaneous return-volatility correlation is positive). In this paper, we first confirm the existence of these anomalies using daily firm-level stock return data on the raw returns, excess returns…
Liang Wu, Jingyi Luo, Yingkai Tang, Gregory Bardes
arXiv · arXiv · 2015
We use bank-level balance sheet data from 2005 to 2010 to study interactions within the banking system of five emerging countries: Argentina, Brazil, Mexico, South Africa, and Taiwan. For each country we construct a financial network based on the leverage ratio dependence between each pair of banks, and find results that are comparable across countries. Banks present a variety of leverage ratio behaviors. This levera…
Diego Aparicio, Daniel Fraiman
arXiv · arXiv · 2015
This paper provides a framework for modeling the financial system with multiple illiquid assets when liquidation of illiquid assets is caused by failure to meet a leverage requirement. This extends the network model of Cifuentes, Shin & Ferrucci (2005) which incorporates a single asset with fire sales and capital adequacy ratio. This also extends the network model of Feinstein (2015) which incorporates multiple illiq…
Zachary Feinstein, Fatena El-Masri