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
February 2021
Abstract
The COVID-19 pandemic has caused some of the largest - and fastest - market
dislocations in modern history. Contemporaneous with the significant fall in equity
market values is the evaporation of market liquidity. We show that transactions costs
increase sharply in a coordinated fashion across global markets, with depth drying up
almost overnight. We show the increase in margin requirements of over 300\% results in
the withdrawal of global liquidity suppliers , driving a pro-cyclical downwards
liquidity spiral. These effects are concentrated in securities most exposed to
electronic liquidity provides, 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