Asset Pricing with Dynamic Margin Constraints
99 Pages Posted: 13 Feb 2009 Last revised: 29 Nov 2014
Date Written: February 6, 2013
The paper provides a novel theoretical analysis of how endogenous time-varying margin requirements affect capital market equilibrium. It finds that margin requirements, when there are no other market frictions, reduce the volatility and the correlation of returns as well as the risk-free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross-sectional dispersion of stock return volatilities. The paper emphasizes that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.
Keywords: exchange economy, margin requirements, general equilibrium
JEL Classification: G11, G12
Suggested Citation: Suggested Citation