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There's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total de
by smaddox 6y ago
There's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total demand, which results in lower prices.
When stocks drop, excess income and capitol drops, reducing demand in the wider market. Companies come under pressure to cut costs, and end up doing layoffs. This further lowers demand, resulting in a feedback loop.
This is all described by Minsky's financial instability-hypothesis. And Steve Keen has built fully dynamic mathematical models that exhibit the process.
- codeisawesome 6y agoOkay - that begins to explain the problem a bit. So people being afraid and just holding on to their newfound gains in just cash or say, T-bills - can depress the entire economy by a lack of interest in stocks. Structurally it seems a little problematic though that companies would depend so much on issuing stock to fund their operations or even growth - ideally they should be able to do that with revenue (or even debt)...