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Contagious Margin Calls: How Covid-19 threatened global stock market liquidity

Sean Foley, Amy Kwan, Richard Philip and Bernt Ødegaard
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Sean Foley: Macquarie University, Australia
Amy Kwan: University of Sydney, Australia
Richard Philip: University of Sydney, Australia

No 2020/1, UiS Working Papers in Economics and Finance from University of Stavanger

Abstract: The Covid-19 epidemic has caused some of the largest - and fastest - market dislocations in modern history. Contemporaneous with the significant fall in equity market values is the evaporation of market liquidity. We document the evolution of transactions costs, depth and rewards to liquidity suppliers across a variety of countries affected by the virus. We show that transactions costs increase sharply in a coordinated fashion across global markets, with depth drying up almost overnight. The withdrawal of global liquidity suppliers is correlated with the increase of over 400% in margin requirements, driving a pro-cyclical downwards liquidity spiral. These affects are shown to be concentrated in securities most exposed to electronic market-makers.

Keywords: Covid-19; Margin requirements; Stock market liquidity (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 G15 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-07-08
New Economics Papers: this item is included in nep-fmk and nep-rmg
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