Leverage constraints and investors' choice of underlyings
TAF Working Paper No. 65/January 2022
78 Pages Posted: 1 Mar 2022 Last revised: 2 May 2023
Date Written: January 15, 2022
This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA) limiting the amount of leverage that investors can take on their trading activities. While it successfully reduced the leverage-usage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constraint investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests. Consistent with the notion that risky investment strategies spread through the population, I find some evidence of a spillover effect to investors who are not affected by the regulatory intervention.
Keywords: Trading Behavior, Risk-Taking, Contracts for Difference, Regulatory Intervention.
JEL Classification: G11, G40, G41.
Suggested Citation: Suggested Citation