Asset Pricing with Dynamic Margin Constraints

Rytchkov, Oleg

doi:10.1111/jofi.12100

Cited by 61 publications

(36 citation statements)

References 85 publications

(120 reference statements)

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“…On the other hand, our results are in contrast to those in Rytchkov (2014), who shows that when the margin requirement are contingenet on market conditions, such as the volatility of returns, in a very general way, and when the margin constraint is binding, in equilibrium the corresponding risk-free rate is lower, the volatility of return is lower, and the market price of risk and risk premium are both higher. In our model, the change of margin requirements is not contingent on any of the market conditions.…”

Section: Optimal Margined Portfolios When Uniform Margin Rate Is Changedcontrasting

confidence: 99%

Margin requirements and portfolio optimization: A geometric approach

Guo

2014

J Asset Manag

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Using geometric illustrations, we investigate what implications of portfolio optimization in equilibrium can be generated by the simple mean-variance framework, under margin borrowing restrictions. First, we investigate the case of uniform marginability on all risky assets.It is shown that changing from unlimited borrowing to margin borrowing shifts the market portfolio to a riskier combination, accompanied by a higher risk premium and a lower price of risk. With the linear risk-return preference, more stringent margin requirements lead to a riskier market portfolio, contrary to the conventional belief. Second, we investigate the effects of differential marginability on portfolio optimization by allowing only one of the risky assets to be pledged as collateral. It is shown that the resulting optimal portfolio is not always tilted towards holding more of the marginable asset, when the margin requirement is loosened.

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Section: Optimal Margined Portfolios When Uniform Margin Rate Is Changedcontrasting

confidence: 99%

Margin requirements and portfolio optimization: A geometric approach

Guo

2014

J Asset Manag

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“…Our economic model shares some features with the models by Coen-Pirani (2005), Rytchkov (2013) and Chabakauri (2013). The results in our paper, however, are in stark contrast to the findings of Coen-Pirani and Rytchkov.…”

Section: Literaturesupporting

confidence: 59%

“…In such an economy, collateral constraints substantially increase return volatility even if the common IES is equal to one. Rytchkov (2013) considers a continuous-time model where two agents maximize expected utility and differ in risk-aversion. As in Coen-Pirani (2005), all consumption stems from dividend payments of the tree.…”

Section: Literaturementioning

confidence: 99%

Margin regulation and volatility

Brumm

Grill

Kübler

et al. 2015

Journal of Monetary Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractIn this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium infinite-horizon economy with heterogeneous agents and collateral constraints. There are two assets in the economy which can be used as collateral for short-term loans. For the first asset the margin requirement is exogenously regulated while the margin requirement for the second asset is determined endogenously. In our calibrated economy, the presence of collateral constraints leads to strong excess volatility. Thus, a regulation of margin requirements may have stabilizing effects. However, in line with the empirical evidence on margin regulation in U.S. stock markets, we show that changes in the regulation of one class of assets may have only small effects on these assets' return volatility if investors have access to another (unregulated) class of collateralizable assets to take up leverage. In contrast, a countercyclical margin regulation of all asset classes in the economy has a very strong dampening effect on asset return volatility.Keywords: collateral constraints, general equilibrium, heterogeneous agents, margin requirements, Regulation T.JEL Classification Codes: D53, G01, G12, G18.ECB Working Paper 1698, July 2014 1 Non-Technical SummaryRegulating margin requirements or haircuts for securities financing transactions has for a long time been considered as a potential tool to limit the build-up of leverage and dampen volatility in financial markets. For example, following the US stock market crash in 1929 the Federal Reserve Board (FRB) was granted the power to set initial margin requirements for margin trading, i.e. investors building a leveraged position in securities using loans that are collateralised by the securities that are purchased. The margin requirement dictates how much investors can borrow against these securities. The FRB established Regulation T to set minimum margin requirements for such partially loan-financed transactions of exchange-traded securities. However, the majority of empirical studies analysing Regulation T did not provide substantial evidence that regulating margin requirements in stock markets had an economically significant impact on market volatility. Eighty years later, in the aftermath of the financial crisis of 2007-2009, it has again been argued that excessively low margin requirements or haircuts contributed both to the buildu...

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“…Shleifer and Vishny (1997) provides a simple framework that helps us understand how limited arbitrage capital that is constrained by borrowing capacity can allow prices to diverge far from their fundamental values. The intuition has been developed further in Gromb and Vayanos (2002), Acharya and Pedersen (2005), Brunnermeier and Pedersen (2009), Garleanu andPedersen (2011) andRytchkov (2014). Frazzini and Pedersen (2014) extend the model of Black (1972) and derive a zero-cost, market-neutral pricing factor called BAB (betting against beta) -that is, a portfolio that longs lowbeta stocks and shorts high-beta stocks.…”

Section: Literature Reviewmentioning

confidence: 99%