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Asset Pricing with Dynamic Margin Constraints

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  • OLEG RYTCHKOV

Abstract

type="main"> This paper provides a novel theoretical analysis of how endogenous time-varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk-free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross-sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.

Suggested Citation

  • Oleg Rytchkov, 2014. "Asset Pricing with Dynamic Margin Constraints," Journal of Finance, American Finance Association, vol. 69(1), pages 405-452, February.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:1:p:405-452
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    File URL: http://hdl.handle.net/10.1111/jofi.12100
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    Cited by:

    1. Jun Tong & Jian-Qiang Hu & Jianxin You, 2019. "Asynchronous Algorithms for Computing Equilibrium Prices in a Capital Asset Pricing Model," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 36(05), pages 1-17, October.
    2. Arianna Miglietta & Cristina Picillo & Mario Pietrunti, 2015. "The impact of CCPs' margin policies on repo markets," BIS Working Papers 515, Bank for International Settlements.
    3. Yaping Zhou & Xundi Diao & Dayong Lv, 2023. "Role of OTC options in stock price efficiency: Evidence from the Chinese market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4629-4655, December.
    4. Tong, Jun & Hu, Jiaqiao & Hu, Jianqiang, 2017. "Computing equilibrium prices for a capital asset pricing model with heterogeneous beliefs and margin-requirement constraints," European Journal of Operational Research, Elsevier, vol. 256(1), pages 24-34.
    5. Buffa, Andrea M. & Hodor, Idan, 2023. "Institutional investors, heterogeneous benchmarks and the comovement of asset prices," Journal of Financial Economics, Elsevier, vol. 147(2), pages 352-381.
    6. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2015. "Collateral Requirements And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 1-25, February.
    7. Amir Akbari & Francesca Carrieri & Aytek Malkhozov, 2017. "Reversals in Global Market Integration and Funding Liquidity," International Finance Discussion Papers 1202, Board of Governors of the Federal Reserve System (U.S.).
    8. Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    9. Ammann, Manuel & Coqueret, Guillaume & Schade, Jan-Philip, 2016. "Characteristics-based portfolio choice with leverage constraints," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 23-37.
    10. Chabakauri, Georgy & Han, Brandon Yueyang, 2020. "Collateral constraints and asset prices," Journal of Financial Economics, Elsevier, vol. 138(3), pages 754-776.
    11. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    12. Khandokar Istiak & Apostolos Serletis, 2017. "Monetary policy and leverage shocks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(2), pages 115-128, April.
    13. Lei Shi & Yajun Xiao, 2021. "Dynamic Asset Pricing with Interactions between Short-Sale and Borrowing Constraints [Multiplicity in general financial equilibrium with portfolio constraints]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 11(4), pages 886-923.
    14. Dayong Lv & Wenfeng Wu, 2020. "Margin trading and price efficiency: information content or price‐adjustment speed?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2889-2918, September.
    15. Tyler Abbot, 2017. "General Equilibrium Under Convex Portfolio Constraints and Heterogeneous Risk Preferences," Papers 1706.05877, arXiv.org, revised Jun 2018.
    16. Chabakauri, Georgy & Rytchkov, Oleg, 2014. "Asset pricing with index investing," LSE Research Online Documents on Economics 60739, London School of Economics and Political Science, LSE Library.
    17. Sheng Guo, 2014. "Margin requirements and portfolio optimization: A geometric approach," Journal of Asset Management, Palgrave Macmillan, vol. 15(3), pages 191-204, June.
    18. Chabakauri, Georgy & Rytchkov, Oleg, 2021. "Asset pricing with index investing," Journal of Financial Economics, Elsevier, vol. 141(1), pages 195-216.
    19. Albert Menkveld & Emiliano Pagnotta & Marius Andrei Zoican, 2016. "Does Central Clearing Affect Price Stability? Evidence from Nordic Equity Markets," Working Papers hal-01253702, HAL.
    20. Philippe Mueller & Gyuri Venter & Andrea Vedolin & Aytek Malkhozov, 2014. "International Liquidity CAPM," 2014 Meeting Papers 1165, Society for Economic Dynamics.
    21. Rytchkov, Oleg, 2016. "Time-Varying Margin Requirements and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(2), pages 655-683, April.
    22. Chabakauri, Georgy, 2015. "Asset pricing with heterogeneous preferences, beliefs, and portfolio constraints," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 21-34.
    23. Jianfeng Hu, 2020. "Is the synthetic stock price really lower than actual price?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(12), pages 1809-1824, December.
    24. Kargar, Mahyar, 2021. "Heterogeneous intermediary asset pricing," Journal of Financial Economics, Elsevier, vol. 141(2), pages 505-532.

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