Margin Requirements and Evolutionary Asset Pricing

Anastasiia Sokko and Klaus Schenk-Hoppé
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Anastasiia Sokko: University of Zurich and Swiss Finance Institute

No 17-20, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce an evolutionary equilibrium asset pricing model with heterogeneous agents who can either act as brokers or hedge funds. Hedge funds can trade on margin, taking short or (leveraged) long positions in the assets. Brokers provide asset loans and credit to margin traders. In any evolutionary equilibrium, where growth rates of wealth under management are identical, assets are priced according to expected relative dividends (the Kelly rule) and margin traders either leverage long or short the Kelly portfolio. Margin requirements affect the equilibrium interest rates but not the level of asset prices. We also apply the model to study the impact of margin requirements on the speed of price adjustment in the presence of noise traders.

Keywords: Margin Trading; Short Selling; Brokers; Evolutionary Finance (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-06
New Economics Papers: this item is included in nep-evo
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1720

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