4 ms·
>Taking that into account, could a slow and steady rise not just become a system equilibrium and go on an on? There's positive feedback inherent in the system
by ThrustVectoring 9y ago
>Taking that into account, could a slow and steady rise not just become a system equilibrium and go on an on?
There's positive feedback inherent in the system under control. Specifically, lower volatility makes it safer and more profitable to use leverage. This leverage will force people to overreact to negative market movement.
- OscarCunningham 9y agoWhy do they have to overreact? They're smart. Often they're computers. Can't they just ... not?
- ThrustVectoring 9y agoAs the market falls, their portfolio value falls while the loan amount remains constant, increasing leverage. All levered positions must either sell into corrections or let their leverage increase to unacceptable levels. And at some point, the folks lending you money will have the right to call in the loans you took to buy securities. This automatic buy high / sell low effect is why people like using less leverage in more volatile markets. When volatility is high enough, it starts becoming advantageous to hold cash to buy the dip / sell the peak. The breakeven point between "more money in the market" and "volatility cleans out my position" can be calculated with the Kelley Criterion.