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Margin requirements and equilibrium asset prices

  • Coen-Pirani, Daniele

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 2 (March)
Pages: 449-475

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Handle: RePEc:eee:moneco:v:52:y:2005:i:2:p:449-475
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  10. Sanford J. Grossman & Jean-Juc Vila, . "Optimal Dynamic Trading with Leverage Constraints," Rodney L. White Center for Financial Research Working Papers 36-89, Wharton School Rodney L. White Center for Financial Research.
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