Using mostly theoretical models and traditional risk/uncertainty measures (VIX index, panic, precaution, scary bad news, etc ), the current literature tries to clarify the risk/uncertainty-deleveraging pattern The findings are not sufficient to explain the dynamic empirical relationship between modern risk/uncertainty indicators and leverage We fill this gap in the literature by using US quarterly data, from 1985:1 to 2018:4, Granger causality tests, and a structural vector autoregression model We find that commercial bank leverage rises when geopolitical risk and macroeconomic, policy, and equity uncertainty increase Client-based business relationships of banks and high government borrowing from banks during crises periods are responsible for this relationship We find that the leverage of broker-dealers and shadow banks declines when Chicago risk and macroeconomic, policy, financial, and equity uncertainty increase We argue that the vulnerability of broker-dealers and shadow banks to the risk/uncertainty of the entire market system is responsible for this relationship
Risk, uncertainty, and leverage