Scandinavian Working Papers in Economics
UiS Working Papers in Economics and Finance,
University of Stavanger
No 2020/1: Contagious Margin Calls: How Covid-19 threatened global stock market liquidity
Sean Foley, Amy Kwan, Richard Philip and Bernt Arne Ødegaard ()
Additional contact information
Sean Foley: Macquarie University, Australia
Amy Kwan: University of Sydney, Australia
Richard Philip: University of Sydney, Australia
Bernt Arne Ødegaard: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Abstract: The Covid-19 epidemic has caused some of the largest - and fastest - market dislocations in modern history. Contemporaneous with the significant fall in equity market values is the evaporation of market liquidity. We document the evolution of transactions costs, depth and rewards to liquidity suppliers across a variety of countries affected by the virus. We show that transactions costs increase sharply in a coordinated fashion across global markets, with depth drying up almost overnight. The withdrawal of global liquidity suppliers is correlated with the increase of over 400% in margin requirements, driving a pro-cyclical downwards liquidity spiral. These affects are shown to be concentrated in securities most exposed to electronic market-makers.
Keywords: Covid-19; Margin requirements; Stock market liquidity
23 pages, July 8, 2020
Full text files
uis_wps_2020_01_odegaard.pdfFull text
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