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

August 2021

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 a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity suppliers, driving a pro-cyclical downwards liquidity spiral. 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;

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