Contagious Margin Calls: How COVID-19 threatened global stock market liquidity
by Sean Foley, Macquarie University, Australia, Amy Kwan, University of
Sydney, Australia, Richard Philip, University of Sydney, Australia and
Bernt Arne Ødegaard, University of Stavanger
Sept 2021
Forthcoming in Journal of Financial Markets
Abstract
The outbreak of the COVID-19 pandemic caused some of the largest - and fastest -
market dislocations in modern history. During the outbreak, liquidity quickly
evaporated in a coordinated fashion across global markets. We show that a sudden
increase in margin requirements during the pandemic is correlated with the withdrawal
of global liquidity providers. These effects are concentrated in securities most
exposed to high-frequency market makers, consistent with the binding nature of
increased capital constraints.
Keywords: Covid-19; Margin requirements; Stock market liquidity; Liquidity Spiral
JEL classifications G01; G12; G14; G15;
Paper
Summaries
Talks
- 2021 Financial Intermediation Research Society (FIRS) Conference in
Vancouver. Talk by Bernt Arne Ødegaard: Slides
- SFM 2020 -- The 28th Conference on the Theories and Practices of
Securities and Financial Markets, Taiwan, 2020. Talk by Sean Foley:
Slides
Links