Contagious Margin Calls: How COVID-19 Threatened Global Stock Market Liquidity

28 Pages Posted: 9 Jul 2020 Last revised: 2 Sep 2020

See all articles by Sean Foley

Sean Foley

Macquarie University

Amy Kwan

University of Sydney Business School

Richard Philip

University of Sydney Business School

Bernt Arne Ødegaard

University of Stavanger

Date Written: July 8, 2020

Abstract

The COVID-19 pandemic has caused some of the largest - and fastest - market dislocations in modern history. Contemporaneous with the significant fall in equity market values is the evaporation of market liquidity. We show that transactions costs increase sharply in a coordinated fashion across global markets, with depth drying up almost overnight. The withdrawal of global liquidity suppliers is correlated with the increase of over 400% in margin requirements, driving a pro-cyclical downwards liquidity spiral. These effects are shown to be concentrated in securities most exposed to electronic liquidity provides, consistent with the binding nature of increased capital constraints.

Keywords: COVID-19, Margin requirements, Stock market liquidity

JEL Classification: G01, G12, G14, G15

Suggested Citation

Foley, Sean and Kwan, Amy and Philip, Richard and Ødegaard, Bernt Arne, Contagious Margin Calls: How COVID-19 Threatened Global Stock Market Liquidity (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3646431 or http://dx.doi.org/10.2139/ssrn.3646431

Sean Foley

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia
0417702600 (Phone)

Amy Kwan

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Richard Philip

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Bernt Arne Ødegaard (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, NO-4036
Norway

HOME PAGE: http://www6.uis.no/ansatt/odegaard

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