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

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