Minsky Moment

AAA

DEFINITION of 'Minsky Moment'

When a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be. This crisis is named after Hyman Minsky, an economist and professor famous for arguing the inherent instability of markets, especially bull markets. He felt that long bull markets only ended in large collapses.

INVESTOPEDIA EXPLAINS 'Minsky Moment'

The phrase "Minsky moment" was coined by Paul McCulley in 1998 while referring to the Asian Debt Crisis of 1997, in which speculators put increasing pressure on dollar-pegged Asian currencies until they eventually collapsed. These types of crises occur because investors take on additional risk during prosperous times or bull markets. The longer a bull market lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.

For example an investor might borrow funds to invest while the market is in an upswing. If the market drops slightly, leveraged assets might not cover the debts taken to acquire them. Soon after, lenders start calling in their loans. Speculative assets are hard to sell, so investors start selling less speculative ones to take care of the loans being called in. The sale of these investments causes an overall decline in the market. At this point, the market is in a Minsky moment. The demand for liquidity might even force the country's central bank to intervene.

RELATED TERMS
  1. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  2. Bull Market

    A financial market of a group of securities in which prices are ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  5. Liquidity

    1. The degree to which an asset or security can be bought or ...
  6. Demand Note

    A loan with no fixed term or set duration of repayment. It can ...
RELATED FAQS
  1. What is a liquidity squeeze?

    A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding ... Read Full Answer >>
  2. What number of shares determines adequate liquidity for a stock?

    Liquidity refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought ... Read Full Answer >>
  3. What are the components of the risk premium for investments?

    The risk premium is the excess return above the risk-free rate that investors require as compensation for the higher uncertainty ... Read Full Answer >>
  4. How does a company decide when it is going to split its stock?

    There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see ... Read Full Answer >>
  5. What securities can I use to engage in speculation of an asset while limiting my ...

    If you want to engage in speculation of an asset while limiting your costs, use a derivative security. Since a derivative ... Read Full Answer >>
  6. How can an investor profit from a fall in the chemicals sector?

    An investor can profit from a fall in the chemicals sector by short selling chemical stocks and exchange-traded funds (ETFs), ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How Will The Subprime Mess Impact You?

    The subprime collapse could mean doom and gloom for housing, equities and the overall economy.
  2. Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  3. Mutual Funds & ETFs

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  4. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  5. Markets

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  6. Investing

    The Risks & Rewards of Penny Stocks

    Penny stocks can make you a lot of money in a short period of time, but this is a very dangerous game that almost always will leads to losses.
  7. Investing

    Penny Stocks that Had Potential But Failed

    Welcome to the wild world of penny stocks. Here's what to expect.
  8. Investing

    Investing In Crisis, A High Risk-High Reward Strategy

    The financial crisis of 2008 and the great recession that followed is still fresh in the memories of many investors.
  9. Mutual Funds & ETFs

    How To Start a Hedge Fund In the United States

    A general overview of how to start a hedge fund firm in the United States, including complying with state and federal regulations.
  10. Mutual Funds & ETFs

    How To Start A Hedge Fund In The UK

    Starting a new hedge fund in the United Kingdom is more complex than in the United States. We discuss UK laws and regulations for starting a new hedge fund.

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center