Leverage theory, more rarely also leverage hypothesis

Attempt to explain the empirically ascertainable fact that – an increase in volatility on the stock market is accompanied by a fall in share prices, and that – share prices rise when volatility falls. – The rationale is seen in the fact that when the value of a company declines, the percentage of equity falls and thus leverage increases. This in turn results in many investors dumping the relevant shares; volatility increases. The increase in volatility will cause banks to adjust their lending conditions, i.e. to raise the interest rate for further loans. – Of course, other reasons, such as a general or industry-specific turnaround in expectations, can also be the cause of the interaction described above. – See Stock market volatility, Valuability, Deleveraging, Domino effect, Financial market stress, Sentiment, Price/cash flow ratio, Margin coverage, Sharpe ratio, Variance, Volatility.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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