 The Laws of Motion of the Broker Call Rate in the United StatesIJFS, 2019, vol. 7, issue 4, 1-23 Abstract: In this paper, which is the third installment of the author’s trilogy on margin loan pricing, we analyze 1367 monthly observations of the U.S. broker call money rate, e.g., the interest rate at which stockbrokers can borrow to fund their margin loans to retail clients. We describe the basic features and mean-reverting behavior of this series and juxtapose the empirically-derived laws of motion with the author’s prior theories of margin loan pricing (Garivaltis 2019a, 2019b). This allows us to derive stochastic differential equations that govern the evolution of the margin loan interest rate and the leverage ratios of sophisticated brokerage clients (namely, continuous-time Kelly gamblers). Finally, we apply Merton’s (1974) arbitrage theory of corporate liability pricing to study theoretical constraints on the risk premia that could be generated in the market for call money. Apparently, if there is no arbitrage in the U.S. financial markets, the implication is that the total volume of call loans must constitute north of 70 % of the value of all leveraged portfolios. Keywords: broker call rate; call money rate; margin loans; net interest margin; risk premium; mean-reverting processes; vasicek model; Kelly criterion; monopoly pricing; arbitrage pricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:7:y:2019:i:4:p:56-:d:272663 Access Statistics for this article IJFS is currently edited by Ms. Hannah Lu More articles in IJFS from MDPI |
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