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

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) 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

Pelster, Matthias, Leverage constraints and investors' choice of underlyings (January 15, 2022). TAF Working Paper No. 65/January 2022, 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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