Contagious Margin Calls: How COVID-19 Threatened Global Stock Market Liquidity
Forthcoming, Journal of Financial Markets
51 Pages Posted: 9 Jul 2020 Last revised: 15 Oct 2021
Date Written: October 10, 2021
The outbreak of the COVID-19 pandemic caused some of the largest - and fastest - market dislocations in modern history. During the outbreak, liquidity quickly evaporated in a coordinated fashion across global markets. We show a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity suppliers, driving a pro-cyclical downwards liquidity spiral. These effects are concentrated in securities most exposed to high frequency market makers, consistent with the binding nature of increased capital constraints.
Keywords: COVID-19; Margin requirements; Stock market liquidity; Liquidity spiral
JEL Classification: G01, G12, G14, G15
Suggested Citation: Suggested Citation