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The role of derivatives in market strains during the COVID-19 crisis

Author

Listed:
  • Carlos González Pedraz

    (Banco de España)

  • Adrian van Rixtel

    (Banco de España)

Abstract

Since the onset of the pandemic, the equity market has experienced bouts of high volatility, with private investors’ use of derivatives for speculative purposes being cited as a relevant factor in some cases. This paper analyses two specific episodes: the revaluation of GameStop stock, and the swift rise and subsequent collapse of Archegos Capital. In both instances, the leverage provided by derivatives generated strains in the functioning of illiquid market segments in the form of trading feedback loops.

Suggested Citation

  • Carlos González Pedraz & Adrian van Rixtel, 2021. "The role of derivatives in market strains during the COVID-19 crisis," Occasional Papers 2123, Banco de España.
    • Handle: RePEc:bde:opaper:2123e
    as

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    References listed on IDEAS

    as
    1. Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
    2. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
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    More about this item

    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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