IDEAS home Printed from https://ideas.repec.org/p/unl/unlfep/wp616.html
   My bibliography  Save this paper

Do security prices rise or fall when margins are raised?

Author

Listed:
  • Jean-Marc Bottazzi
  • Mario R. Pascoa
  • Guillermo Ramirez

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 & Mario R. Pascoa & Guillermo Ramirez, 2017. "Do security prices rise or fall when margins are raised?," FEUNL Working Paper Series wp616, Universidade Nova de Lisboa, Faculdade de Economia.
  • Handle: RePEc:unl:unlfep:wp616
    as

    Download full text from publisher

    File URL: https://run.unl.pt/bitstream/10362/25470/1/WP616.pdf
    Download Restriction: no

    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. 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.
    3. 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.
    4. 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.
    5. 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," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01479252, HAL.
    6. Jean-Marc Bottazzi & Mario R. Pascoa & Guillermo Ramirez, 2017. "Determinants of repo haircuts and bankruptcy," FEUNL Working Paper Series wp615, Universidade Nova de Lisboa, Faculdade de Economia.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:unl:unlfep:wp616. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Susana Lopes). General contact details of provider: http://edirc.repec.org/data/feunlpt.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.