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Leverage constraints and investors' choice of underlyings

Journal of Banking and Finance, 107150.

68 Pages Posted: 1 Mar 2022 Last revised: 26 Mar 2024

See all articles by Matthias Pelster

Matthias Pelster

University of Duisburg-Essen - Mercator School of Management; european center for financial services (ecfs)

Date Written: January 15, 2022

Abstract

This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA), which limits the amount of leverage that retail investors can take on their trading activities. While the intervention successfully reduced leverage-usage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constrained investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests.

Keywords: Trading Behavior, Risk-Taking, Contracts for Difference, Regulatory Intervention.

JEL Classification: G11, G40, G41.

Suggested Citation

Pelster, Matthias, Leverage constraints and investors' choice of underlyings (January 15, 2022). Journal of Banking and Finance, 107150. , Available at SSRN: https://ssrn.com/abstract=4010700 or http://dx.doi.org/10.2139/ssrn.4010700

Matthias Pelster (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

european center for financial services (ecfs) ( email )

Lotharstraße 65
Duisburg, 47057
Germany

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