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Margin trade, short sales and financial stability
Hui Ying Sng1; Yang Zhang2; Huanhuan Zheng3
2019-07-01
Source PublicationJournal of Economic Interaction and Coordination
ISSN1860-711X
Abstract

We model how leveraged trading activities constrained by dynamic funding availability affect financial stability. In the market, customers trade based on the fundamental value of the risky asset and make full payment for their transactions, while speculators take trading position based on margin, which is constantly adjusted by the financier, the fund provider, according to the price volatility. As a result of equilibrium price discontinuity triggered by dynamic margin requirements, trivial shocks to external supply, wealth or fundamental value can be transmitted into asset price crashes or jumps. We find that tightening margin requirements improves (mitigates) the market liquidity in the bull (bear) market, and that imposing short sale constraints helps prevent the price from falling further when the asset is sufficiently under-priced and accelerate price collapse when the asset is over-priced.

KeywordMargin Requirement Financial Stability Speculation Leverage
DOIhttps://doi.org/10.1007/s11403-019-00256-3
Language英语
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Document TypeJournal article
CollectionFaculty of Business Administration
DEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Corresponding AuthorHuanhuan Zheng
Affiliation1.School of Social Sciences, Nanyang Technological University, Singapore, Singapore
2.Faculty of Business Administration, University of Macau, Macau SAR, China
3.Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, Singapore
Recommended Citation
GB/T 7714
Hui Ying Sng,Yang Zhang,Huanhuan Zheng. Margin trade, short sales and financial stability[J]. Journal of Economic Interaction and Coordination,2019.
APA Hui Ying Sng,Yang Zhang,&Huanhuan Zheng.(2019).Margin trade, short sales and financial stability.Journal of Economic Interaction and Coordination.
MLA Hui Ying Sng,et al."Margin trade, short sales and financial stability".Journal of Economic Interaction and Coordination (2019).
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