TY - BOOK ID - 84659170 TI - Why Does Bad News Increase Volatility and Decrease Leverage? AU - Fostel, Ana. AU - Geanakoplos, John. AU - International Monetary Fund. PY - 2010 SN - 1462356745 1455237469 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Stock price forecasting. KW - Speculation KW - Information technology KW - Bucket-shops KW - Commercial corners KW - Corners, Commercial KW - Finance KW - Gambling KW - Commodity exchanges KW - Contracts, Aleatory KW - Investments KW - Stock exchanges KW - Forecasting, Stock price KW - Security price forecasting KW - Stocks KW - Business forecasting KW - Prices KW - Forecasting KW - Investments: General KW - Investments: Bonds KW - Macroeconomics KW - Industries: Financial Services KW - Incomplete Markets KW - General Equilibrium and Disequilibrium: Financial Markets KW - Financial Markets and the Macroeconomy KW - Financial Crises KW - Portfolio Choice KW - Investment Decisions KW - General Financial Markets: General (includes Measurement and Data) KW - Price Level KW - Inflation KW - Deflation KW - Banks KW - Depository Institutions KW - Micro Finance Institutions KW - Mortgages KW - Macroeconomics: Consumption KW - Saving KW - Wealth KW - Investment & securities KW - Asset prices KW - Collateral KW - Bonds KW - Securities KW - Consumption KW - Loans KW - Financial instruments KW - Economics UR - https://www.unicat.be/uniCat?func=search&query=sysid:84659170 AB - The literature on leverage until now shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility. This paper suggests a reason why bad news is more often than not associated with higher future volatility. We show that, in a model with endogenous leverage and heterogeneous beliefs, agents have the incentive to invest mostly in technologies that become volatile in bad times. Together with the old literature this explains pro-cyclical leverage. The result also gives rationale to the pattern of volatility smiles observed in the stock options since 1987. Finally, the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium. ER -