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Margin Requirements and Equilibrium Asset Prices

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  • Daniele Coen-Pirani

Abstract

This paper studies the effect of margin requirements on asset prices, trading volume and investors' welfare in a general equilibrium asset pricing model where investors differ in their degree of risk aversion. In the stationary equilibrium of the model binding margin requirements decrease the riskless rate and increase its volatility, as well as stock trading volume. Contrary to previous partial equilibrium results, stock prices are not affected by margin requirements. Small changes in margin requirements produce large effects on the long-run distribution of wealth among investors. From a welfare perspective margin requirements might benefit the constrained less risk averse investors, while they always make more risk averse investors worse-off.

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File URL: http://www.andrew.cmu.edu/user/coenp/res_files/margins/paper.pdf
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Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2001-E5.

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Date of creation: Dec 2000
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Handle: RePEc:cmu:gsiawp:274394073

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  8. Coen-Pirani, Daniele, 2004. "Effects Of Differences In Risk Aversion On The Distribution Of Wealth," Macroeconomic Dynamics, Cambridge University Press, vol. 8(05), pages 617-632, November.
  9. Jérôme B. Detemple & Shashidhar Murthy, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," CIRANO Working Papers 97s-12, CIRANO.
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  13. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
  14. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2012. "Margin Requirements and Asset Prices," 2012 Meeting Papers 533, Society for Economic Dynamics.
  2. Enrique G. Mendoza & Katherine A. Smith, 2004. "Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices," NBER Working Papers 10940, National Bureau of Economic Research, Inc.
  3. Felipe Schwartzman, 2012. "When do credit frictions matter for business cycles?," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-230.
  4. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2010. "Two Monetary Tools: Interest Rates and Haircuts," NBER Working Papers 16337, National Bureau of Economic Research, Inc.
  5. Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-Based Asset Pricing and Deviations from the Law of One Price," NBER Working Papers 16777, National Bureau of Economic Research, Inc.
  6. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  7. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2011. "Collateral Requirements and Asset Prices," 2011 Meeting Papers 737, Society for Economic Dynamics.
  8. Georgy Chabakauri, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
  9. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," 2012 Meeting Papers 636, Society for Economic Dynamics.
  10. Gianluca Femminis, 2012. "Risk aversion heterogeneity and the investment-uncertainty relationship," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1260, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  11. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
  12. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
  13. Wen-Chung Guo & Frank Yong Wang & Ho-Mou Wu, 2009. "Financial Leverage and Market Volatility with Diverse Beliefs," Finance Working Papers 22887, East Asian Bureau of Economic Research.
  14. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer, vol. 47(2), pages 337-364, June.
  15. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.
  16. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.

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