The role of derivatives in market strains during the COVID-19 crisis

Carlos González Pedraz () and Adrian van Rixtel ()
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Carlos González Pedraz: Banco de España
Adrian van Rixtel: Banco de España

No 2123, Occasional Papers from Banco de España

Abstract: Since the onset of the pandemic, the equity market has experienced bouts of high volatility, with private investors’ use of derivatives for speculative purposes being cited as a relevant factor in some cases. This paper analyses two specific episodes: the revaluation of GameStop stock, and the swift rise and subsequent collapse of Archegos Capital. In both instances, the leverage provided by derivatives generated strains in the functioning of illiquid market segments in the form of trading feedback loops.

Keywords: equity derivatives; leverage; retail investors; feedback loops; market functioning (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2021-08
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https://www.bde.es/f/webbde/SES/Secciones/Publicac ... 21/Files/do2123e.pdf First version, September 2021 (application/pdf)
https://www.bde.es/f/webbde/SES/Secciones/Publicac ... s/21/Fich/do2123.pdf Spanish version (application/pdf)

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