Do Security Prices Rise or Fall When Margins Are Raised?

Jean-Marc Bottazzi (), Mário Páscoa () and Guillermo Ramírez
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Jean-Marc Bottazzi: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Mário Páscoa: NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: When repo margins are raised by a central clearing counterparty (CCP), the impact on security prices depends on whether the market is 'long' or 'short'. As both the long and the short must post margins, the price impact depends on which side is more leveraged: traders long in the security or those short-selling it. If a raised margin forces more position unwind from the long than from the short, the price will go down to clear the market. However, if short positions are more hit then the long ones, a raised haircut leads to a higher security price!

Date: 2017-11-25
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