Abstract
We empirically investigate the short- and long-run dynamic relationship between security broker–dealer leverage and stock prices. To explore various potential adjustment dynamics, we use the error correction term to construct several threshold indicators that distinguish the deviation from long-run equilibrium. Using these indicators, we estimate different types of threshold cointegration and error correction models and analyze the results in the context of boom and bust cycles in financial markets. Our results show that, in the long run, a 1% increase in the stock price leads to approximately a 0.43% increase in leverage. We show that a momentum autoregressive model with an endogenous threshold does a better job of fitting the financial data. The asymmetric error correction structure shows that changes in leverage experience significant corrective measures when the stock prices plunge during recessions.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
