Margin Lending and Information Production
63 Pages Posted: 4 Dec 2019 Last revised: 2 Aug 2023
Date Written: August 1, 2023
Many types of financial institutions borrow using margin loans. I propose a new explanation for the widespread use of these contracts in the financial system. In my model, margin loans prevent lenders from producing too much information about borrowers' assets at origination, by forcing borrowers to liquidate prior to maturity following a negative shock. However, while margin loans deter information production in the primary market, they induce it in the secondary market, depressing asset prices. The analysis can rationalize policies that curb margin lending in normal times and support it in periods of market stress.
Keywords: Margin lending, information production, adverse selection, optimal security, market equilibrium
JEL Classification: G23, G32, G28
Suggested Citation: Suggested Citation