Asset Pricing with Dynamic Margin Constraints

Oleg Rytchkov

Journal of Finance, 2014, vol. 69, issue 1, 405-452

Abstract: type="main">

This paper provides a novel theoretical analysis of how endogenous time-varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk-free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross-sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.

Date: 2014
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