D1 Price, volatility and leverage

Topic

Five indicators allow us to observe the same property and capital market from different angles, and several of them reinforce one another rather than acting independently: when the relationship between market price and fundamentals deviates excessively, volatility tends to rise; when volatility increases while liquidity falls, aggregate leverage—which previously appeared sustainable—ceases to be so. Ownership concentration, by contrast, measures a different dimension of this same market: who controls the assets, rather than how their prices move.

Stock market indices and the price-to-fundamentals ratio measure market valuation against actual cash flows; extreme and sustained deviation, followed by a reversal, serves as a direct measure of a bubble and subsequent crash.

Volatility measures the magnitude of price fluctuations over a given period; a sudden, sustained increase typically accompanies both the collapse of a bubble (manifesting as an abrupt price reversal) and systemic illiquidity and contagion (manifesting as propagation through the network of nodes).

Liquidity measures assess how easily an asset can be bought or sold without moving its price; a sustained drop in liquidity, combined with high aggregate leverage, is a direct signal of systemic illiquidity and contagion.

Systemic risk indicators—specifically aggregate leverage—measure the financial system's debt level relative to its capacity to absorb losses; crossing the fragility threshold (the "Minsky moment") is the variable that directly triggers systemic illiquidity and contagion. Ownership concentration indices measure the extent to which corporate ownership and control are distributed or, conversely, concentrated; when they consistently cross a threshold marking the closure of the system, they trigger corporate capture and an oligarchy of owners—the only one of the three "track" anomalies that does not depend on the price movements, volatility, or leverage measured by the other four indicators.

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