Time-Varying Margin Requirements and Optimal Portfolio Choice

Oleg Rytchkov

Journal of Financial and Quantitative Analysis, 2016, vol. 51, issue 2, 655-683

Abstract: This paper studies the optimal consumption and portfolio problem of an investor with recursive preferences who is subject to time-varying margin requirements. The level of the requirements at each moment is determined by contemporaneous volatility of returns, which is stochastic and may have jumps. I show that the nonstandard hedging demand produced by margin requirements increases with their persistence and volatility. However, for realistic values of parameters, the hedging demand is small even in the presence of jumps, and contemporaneous jumps in prices have a much stronger effect on optimal portfolio than jumps in constraints.

Date: 2016
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