Margin Requirements and Asset Prices

Michael Grill, Karl Schmedders, Felix Kubler and Johannes Brumm
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Michael Grill: Deutsche Bundesbank
Johannes Brumm: University of Zurich

No 533, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we examine the effect of collateral constraints and margin requirements on the prices of long-lived assets. We consider a Lucas-style infinite-horizon exchange economy with heterogenous agents and collateral constraints. In our calibrated economy collateral constraints lead to a forty percent increase in asset return volatility and a regulation of margin requirements potentially has strong stabilizing effects. While this finding is in line with the existing theoretical literature the empirical evidence indicates that historically the regulation of margin requirements on securities had little effect on volatility. Our main contribution is to reconcile the empirical evidence with our theoretical findings. In a calibrated model with several collateralizable assets, stocks are only a comparatively small fraction of total margin eligible assets. The regulation of margin requirements on this fraction of collateralizable assets might have no or even an elevating effect on volatility.

Date: 2012
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:533

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