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


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;