The Influence of Leverage on Market Structure
By
Elena Rodriguez-Santos
1 min read
⚠️ Heads up: this article is from our "experimental era" — a beautiful mess of enthusiasm ✨, caffeine ☕, and user-submitted chaos 🤹. We kept it because it’s part of our journey 🛤️ (and hey, everyone has awkward teenage years 😅).
In 2006, a paper by Harry Markowitz highlighted how the availability of leverage can distort market equilibrium, a concept still relevant today amidst the boom in index ETFs and retail options trading. The democratization of explicit leverage to all investors may drive security prices higher, creating a potentially destabilizing market. The paper's analysis provides insights into the impact of leverage on portfolio allocation, security returns, and market distortions, signaling potential market vulnerabilities. This warrants a strategic approach to managing leverage to mitigate market distortions and position for future market dynamics.