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

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: October 10, 2021

Abstract

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

Foley, Sean and Kwan, Amy and Philip, Richard and Ødegaard, Bernt Arne, Contagious Margin Calls: How COVID-19 Threatened Global Stock Market Liquidity (October 10, 2021). Forthcoming, Journal of Financial Markets, 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://ba-odegaard.no

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