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Margin requirements and equilibrium asset prices

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  • Coen-Pirani, Daniele

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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  • Coen-Pirani, Daniele, 2005. "Margin requirements and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 449-475, March.
  • Handle: RePEc:eee:moneco:v:52:y:2005:i:2:p:449-475
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    Cited by:

    1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
    2. 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.
    3. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.
    4. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
    5. Nakamoto, Yasuhiro, 2015. "Heterogeneous EIS and Wealth Distribution in a Neoclassical Growth Model," MPRA Paper 67026, University Library of Munich, Germany.
    6. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 337-364, June.
    7. Buss, Adrian & Dumas, Bernard & Uppal, Raman & Vilkov, Grigory, 2016. "The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 25-43.
    8. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Two Monetary Tools: Interest Rates and Haircuts," NBER Chapters,in: NBER Macroeconomics Annual 2010, Volume 25, pages 143-180 National Bureau of Economic Research, Inc.
    9. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, vol. 70(1), pages 82-114, September.
    10. 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, pages 1-25, February.
    11. Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    12. Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-based Asset Pricing and Deviations from the Law of One Price," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1980-2022.
    13. 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).
    14. Felipe Schwartzman, 2012. "When do credit frictions matter for business cycles?," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-230.
    15. Chabakauri, Georgy, 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.
    16. Andrea Pinna, 2015. "Price Formation of Pledgeable Securities," BEMPS - Bozen Economics & Management Paper Series BEMPS26, Faculty of Economics and Management at the Free University of Bozen.
    17. Fuhmei Wang, 2009. "Financial Distortions and Economic Growth: Empirical Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 56-66, May.
    18. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    19. Chabakauri, Georgy, 2015. "Asset pricing with heterogeneous preferences, beliefs, and portfolio constraints," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 21-34.
    20. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2012. "Margin Requirements and Asset Prices," 2012 Meeting Papers 533, Society for Economic Dynamics.
    21. Fuhmei Wang, 2009. "Financial Distortions and Economic Growth: Empirical Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 56-66, May.

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