News of the WeekGerman Physical Society

Leverage: The Root of All Financial Turmoil

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Science  24 Apr 2009:
Vol. 324, Issue 5926, pp. 452-453
DOI: 10.1126/science.324_452b

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According to a new analysis reported at the German Physical Society meeting, leverage--the practice by hedge funds and other investors of borrowing money to buy investments--is the root of many nettlesome properties of financial markets that classical economics cannot explain, including a propensity to crash. The model shows that many of the distinctive statistical properties of financial markets emerge together as rates of leverage climb.