Margin Requirements and Evolutionary Asset Pricing

41 Pages Posted: 14 Jun 2017

See all articles by Anastasiia Sokko

Anastasiia Sokko

University of Zurich, Department of Banking and Finance; Swiss Finance Institute

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: May 25, 2017

Abstract

We introduce an evolutionary equilibrium asset pricing model with heterogeneous agents who can either act as brokers or hedge funds. Hedge funds can trade on margin, taking short or (leveraged) long positions in the assets. Brokers provide asset loans and credit to margin traders. In any evolutionary equilibrium, where growth rates of wealth under management are identical, assets are priced according to expected relative dividends (the Kelly rule) and margin traders either leverage long or short the Kelly portfolio. Margin requirements affect the equilibrium interest rates but not the level of asset prices. We also apply the model to study the impact of margin requirements on the speed of price adjustment in the presence of noise traders.

Keywords: Margin Trading; Short Selling; Brokers; Evolutionary Finance

JEL Classification: G11; G12

Suggested Citation

Sokko, Anastasiia and Schenk-Hoppé, Klaus Reiner, Margin Requirements and Evolutionary Asset Pricing (May 25, 2017). Swiss Finance Institute Research Paper No. 17-20, Available at SSRN: https://ssrn.com/abstract=2982405 or http://dx.doi.org/10.2139/ssrn.2982405

Anastasiia Sokko (Contact Author)

University of Zurich, Department of Banking and Finance ( email )

Schönberggasse 1
Zurich
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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