The Influence of Leverage on Market Structure

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.