Contagious margin calls: How COVID-19 threatened global stock market liquidity

Sean Foley; Amy Kwan; Richard  Philip; Bernt Arne Ødegaard

doi:10.1016/j.finmar.2021.100689

Contagious margin calls: How COVID-19 threatened global stock market liquidity

Sean Foley, Amy Kwan, Richard Philip, Bernt Arne Ødegaard

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

34 Citations (Scopus)

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Abstract

The outbreak of the COVID-19 pandemic caused some of the largest — and fastest — market dislocations in modern history. During the outbreak, liquidity quickly evaporated in a coordinated fashion across global markets. We show that a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity providers. These effects are concentrated in securities most exposed to high-frequency market makers, consistent with the binding nature of increased capital constraints.

Original language	English
Article number	100689
Pages (from-to)	1-23
Number of pages	23
Journal	Journal of Financial Markets
Volume	59
Issue number	Part A
Early online date	30 Oct 2021
DOIs	https://doi.org/10.1016/j.finmar.2021.100689
Publication status	Published - Jun 2022

Keywords

COVID-19
Margin requirements
Stock market liquidity
liquidity spiral

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10.1016/j.finmar.2021.100689

Accepted author manuscriptAccepted author manuscript, 657 KBLicence: CC BY-NC-ND

Cite this

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abstract = "The outbreak of the COVID-19 pandemic caused some of the largest — and fastest — market dislocations in modern history. During the outbreak, liquidity quickly evaporated in a coordinated fashion across global markets. We show that a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity providers. These effects are concentrated in securities most exposed to high-frequency market makers, consistent with the binding nature of increased capital constraints.",

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KW - Stock market liquidity

KW - liquidity spiral

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Contagious margin calls: How COVID-19 threatened global stock market liquidity

Abstract

Keywords

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