Cutting Edge introduction: The tipping-point for leverage

Borrowing the stake for a bet is as old as the hills – and so is losing it. But how much debt is too much for a given position? A group of quants believe they know. Laurie Carver introduces this month’s technical articles

When proposing that the revolutionary war debts of the newly victorious United States should be taken on by the federal government in 1790, secretary of the Treasury Alexander Hamilton argued borrowing, “if not excessive, will be beneficial to the national interest”. What, though, counts as excessive?

Hamilton was later killed in a duel by vice-president Aaron Burr, but striking the right amount of leverage for a given position is a challenge that lives on. The leveraged positions built up by