The Role of Derivatives in Market Strains During the COVID-19 Crisis (El papel de los derivados en las tensiones de los mercados durante la crisis del COVID-19)

24 Pages Posted: 13 Sep 2021

See all articles by Carlos G. Pedraz

Carlos G. Pedraz

Banco de España

Adrian Van Rixtel

Banco de España - Department of International Economics & International Relations

Date Written: September 9, 2021

Abstract

English Abstract: Since the onset of the pandemic, the equity market has experienced bouts of high volatility, with private investors’ use of derivatives for speculative purposes being cited as a relevant factor in some cases. This paper analyses two specific episodes: the revaluation of GameStop stock, and the swift rise and subsequent collapse of Archegos Capital. In both instances, the leverage provided by derivatives generated strains in the functioning of illiquid market segments in the form of trading feedback loops.

Spanish abstract: Desde el comienzo de la pandemia, el mercado de renta variable ha experimentado episodios de alta volatilidad. En alguno de ellos, el uso de derivados con fines especulativos por inversores privados ha sido citado como un factor relevante. En este documento se analizan dos casos concretos: la revalorización de la acción de GameStop, y el rápido ascenso y posterior caída del fondo Archegos Capital. En ambos, el apalancamiento facilitado por los derivados ha generado tensiones en el funcionamiento de segmentos de mercado poco líquidos en forma de ciclos retroalimentados de negociación.

Keywords: equity derivatives, leverage, retail investors, feedback loops, market functioning

JEL Classification: G12, G13, G14

Suggested Citation

G. Pedraz, Carlos and Rixtel, Adrian Van, The Role of Derivatives in Market Strains During the COVID-19 Crisis (El papel de los derivados en las tensiones de los mercados durante la crisis del COVID-19) (September 9, 2021). Banco de Espana Occasional Paper No. 2123, Available at SSRN: https://ssrn.com/abstract=3920499

Carlos G. Pedraz (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Adrian Van Rixtel

Banco de España - Department of International Economics & International Relations ( email )

Alcala 50
Madrid, 28014
Spain

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