{"id":212,"date":"2009-04-21T21:39:12","date_gmt":"2009-04-22T01:39:12","guid":{"rendered":"http:\/\/entropyeconomics.com\/?p=212"},"modified":"2009-04-21T21:40:52","modified_gmt":"2009-04-22T01:40:52","slug":"understanding-leverage-volatility-and-the-crash","status":"publish","type":"post","link":"https:\/\/entropyeconomics.com\/index.php\/2009\/04\/understanding-leverage-volatility-and-the-crash\/","title":{"rendered":"Understanding leverage, volatility, and the crash"},"content":{"rendered":"<p>One can critique Nobel laureate Robert C. Merton&#8217;s work on a number of fronts, from the CAPM model to his involvement with the 1998 failure of Long Term Capital Management. And he still doesn&#8217;t get to the true source of the current crisis &#8212; monetary policy and an erratic U.S. dollar. But I found this MIT lecture useful in explaining how changes in asset prices can drive both instability and volatility in a highly non-linear, pro-cyclical way and confound all the risk and economic models. Merton also offers a simple method to swap risk and improve returns using right-way contracts. (Hat tip: <a href=\"http:\/\/online.wsj.com\/article\/SB124018430498933171.html\">Gordon Crovitz<\/a>.)<\/p>\n<p><object classid=\"clsid:d27cdb6e-ae6d-11cf-96b8-444553540000\" width=\"481\" height=\"271\" codebase=\"http:\/\/download.macromedia.com\/pub\/shockwave\/cabs\/flash\/swflash.cab#version=6,0,40,0\"><param name=\"id\" value=\"Main\" \/><param name=\"align\" value=\"middle\" \/><param name=\"allowScriptAccess\" value=\"always\" \/><param name=\"quality\" value=\"high\" \/><param name=\"bgcolor\" value=\"#000000\" \/><param name=\"src\" value=\"http:\/\/mitworld.mit.edu\/flash\/player\/Main.swf?host=cp58255.edgefcs.net&amp;flv=mitw-01115-shass-muh-award-finance-merton-05mar2009&amp;preview=http:\/\/mitworld.mit.edu\/\/uploads\/mitwstill01115shassmuhawardfinancemerton05mar2009.jpg\" \/><\/object><\/p>\n","protected":false},"excerpt":{"rendered":"<p>One can critique Nobel laureate Robert C. Merton&#8217;s work on a number of fronts, from the CAPM model to his involvement with the 1998 failure of Long Term Capital Management. And he still doesn&#8217;t get to the true source of the current crisis &#8212; monetary policy and an erratic U.S. dollar. But I found this MIT lecture useful in explaining &#8230; <\/p>\n<div><a href=\"https:\/\/entropyeconomics.com\/index.php\/2009\/04\/understanding-leverage-volatility-and-the-crash\/\" class=\"more-link\">Read More<\/a><\/div>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-212","post","type-post","status-publish","format-standard","hentry","category-tech-note","no-post-thumbnail"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/posts\/212","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/comments?post=212"}],"version-history":[{"count":3,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/posts\/212\/revisions"}],"predecessor-version":[{"id":215,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/posts\/212\/revisions\/215"}],"wp:attachment":[{"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/media?parent=212"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/categories?post=212"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/entropyeconomics.com\/index.php\/wp-json\/wp\/v2\/tags?post=212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}