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Funding Constraints and Informational Efficiency

Author

Listed:
  • Sergei Glebkin
  • Naveen Gondhi
  • John Chi-Fong Kuong

Abstract

We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.

Suggested Citation

  • Sergei Glebkin & Naveen Gondhi & John Chi-Fong Kuong, 2021. "Funding Constraints and Informational Efficiency," The Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4269-4322.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:9:p:4269-4322.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa124
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    Cited by:

    1. Wen, Bohui & Bi, ShaSha & Yuan, Ming & Hao, Jing, 2023. "Financial constraint, cross-sectoral spillover and systemic risk in China," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 1-11.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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