Do security prices rise or fall when margins are raised?

Jean-Marc Bottazzi, Mario R. Pascoa and Guillermo Ramirez

Nova SBE Working Paper Series from Universidade Nova de Lisboa, Nova School of Business and Economics

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!

Pages: 45 pages
Date: 2017
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Citations: View citations in EconPapers (1)

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