Keywords: Margin accounts; Buying on margin; short selling; Prime brokerage;
Citation:
Hanson, Samuel G. "Margin Accounts." Harvard Business School Background Note 218-079, January 2018. (Revised February 2019.) View Details|
Working Paper 2019 Reflexivity in Credit Markets |
Abstract
Reflexivity is the idea that investors' biased beliefs affect market outcomes, and that market outcomes in turn affect investors' beliefs. We develop a behavioral model of the credit cycle featuring such a two-way feedback loop. In our model, investors form beliefs about firms' creditworthiness, in part, by extrapolating past default rates. Investor beliefs influence firms' actual creditworthiness because firms that can refinance maturing debt on favorable terms are less likely to default in the short-run---even if fundamentals do not justify investors' generosity. Our model is able to match many features of credit booms and busts, including the imperfect synchronization of credit cycles with the real economy, the negative relationship between past credit growth and the future return on risky bonds, and "calm before the storm" periods in which firm fundamentals have deteriorated but the credit market has not yet turned.
Keywords: reflexivity; Attitudes; Financial Markets; Forecasting and Prediction; Investment; Credit;
Citation:
Greenwood, Robin, Samuel G. Hanson, and Lawrence J. Jin. "Reflexivity in Credit Markets." Working Paper, April 2019.
