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Do Security Prices Rise or Fall When Margins Are Raised?

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  • Jean-Marc Bottazzi

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Mário Páscoa

    (NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon)

  • Guillermo Ramírez

Abstract

When repo margins are raised by a central clearing counterparty (CCP), the impact on security prices depends on whether the market is 'long' or 'short'. As both the long and the short must post margins, the price impact depends on which side is more leveraged: traders long in the security or those short-selling it. If a raised margin forces more position unwind from the long than from the short, the price will go down to clear the market. However, if short positions are more hit then the long ones, a raised haircut leads to a higher security price!

Suggested Citation

  • Jean-Marc Bottazzi & Mário Páscoa & Guillermo Ramírez, 2017. "Do Security Prices Rise or Fall When Margins Are Raised?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01648215, HAL.
    • Handle: RePEc:hal:cesptp:hal-01648215
    Note: View the original document on HAL open archive server: https://paris1.hal.science/hal-01648215
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    References listed on IDEAS

    as
    1. Bottazzi, Jean-Marc & Luque, Jaime & Páscoa, Mário R., 2012. "Securities market theory: Possession, repo and rehypothecation," Journal of Economic Theory, Elsevier, vol. 147(2), pages 477-500.
    2. Jean-Marc Bottazzi & Mario Pascoa & Guillermo Ramirez, 2017. "Determinants of Repo Haircuts and Bankruptcy," School of Economics Discussion Papers 0717, School of Economics, University of Surrey.
    3. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    5. Aloisio Araujo & Mário Rui Páscoa & Juan Pablo Torres-Martínez, 2002. "Collateral Avoids Ponzi Schemes in Incomplete Markets," Econometrica, Econometric Society, vol. 70(4), pages 1613-1638, July.
    6. Angela Armakola & Raphaël Douady & Jean-Paul Laurent & Francesco Molteni, 2020. "Repurchase agreements and systemic risk in the European sovereign debt crises: the role of European clearing houses," Working Papers hal-01479252, HAL.
    7. Jean-Marc Bottazzi & Mario R. Pascoa & Guillermo Ramirez, 2017. "Determinants of repo haircuts and bankruptcy," Nova SBE Working Paper Series wp615, Universidade Nova de Lisboa, Nova School of Business and Economics.
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