Funding Constraints and Informational Efficiency

Sergei Glebkin, Naveen Gondhi and John Chi-Fong Kuong

The Review of Financial Studies, 2021, vol. 34, issue 9, 4269-4322

Abstract: We analyze a tractable rational expectations equilibrium model with margin constraints. We argue that constraints affect and are affected by informational efficiency, leading to a novel amplification mechanism. A decline in wealth tightens constraints and reduces investors’ incentive to acquire information, lowering price informativeness. Lower informativeness, in turn, increases the risk borne by financiers who fund trades, leading them to further tighten constraints faced by investors. This information spiral leads to (a) significant increases in risk premium and return volatility in crises, when investors wealth declines, (b) complementarities in information acquisition in crises, and (c) complementarities in margin requirements.

JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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