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

JEL-codes: G01; G12; G14; G15

23 pages, July 8, 2020

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