All-in Investors and Unstable Asset Prices

39 Pages Posted: 18 Feb 2021 Last revised: 1 Apr 2021

See all articles by Edward Dickersin Van Wesep

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Brian Waters

University of Colorado, Boulder

Date Written: March 31, 2021

Abstract

We analyze a setting in which a risky asset is traded by two types of investors: some are all in and buy up to their margin limit and some buy and sell based on the asset's fundamental value. A higher price of the asset increases all-in investor wealth and they borrow against this wealth to buy more shares. All-in investor demand for shares is therefore upward sloping. If all-in investors have (i) enough wealth, and (ii) access to at least 2:1 leverage, then aggregate demand for shares can be upward sloping and an equilibrium price therefore unstable. If P1 is an equilibrium price, then there exists a price P2>P1 that also clears the market. P1 is unstable and P2 is stable. Unfortunately, if the price actually is P2, then it will be unstable and there will exist a P3>P2 that clears the market and is stable. This is true for any arbitrarily high proposed price. Our theory provides an explanation for the prominent and sudden surge in prices in January 2021 for retail stocks such as GameStop Corporation.

Keywords: GameStop, Asset Pricing, Unstable

JEL Classification: G02, G12

Suggested Citation

Van Wesep, Edward Dickersin and Waters, Brian, All-in Investors and Unstable Asset Prices (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3785637 or http://dx.doi.org/10.2139/ssrn.3785637

Edward Dickersin Van Wesep (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Brian Waters

University of Colorado, Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States
3034921703 (Phone)

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