Oleg Rytchkov is at the Fox School of Business, Temple University. This paper draws upon my earlier paper circulated under the title “Dynamic Margin Constraints.” I am grateful to Nina Baranchuk, Lorenzo Garlappi, Ilan Guedj, Jennifer Huang, Leonid Kogan, Igor Makarov, Jun Pan, Dimitris Papanikolaou, Steve Ross, Astrid Schornick (discussant), Elizaveta Shevyakhova, Sophie Shive (discussant), Sheridan Titman, Stathis Tompaidis, Jiang Wang, seminar participants at Boston University, New Economic School, Nova Southeastern University, Purdue University, Temple University, University of Texas at Austin, and University of Texas at Dallas, as well as participants of the 2009 European Finance Association Meetings and 2009 Financial Management Association Meetings for very helpful and insightful comments. I especially thank Campbell Harvey (the Editor), an anonymous Associate Editor, and two anonymous referees for many comments and suggestions that substantially improved the paper. All remaining errors are my own.
Asset Pricing with Dynamic Margin Constraints
Article first published online: 7 JAN 2014
© 2013 the American Finance Association
The Journal of Finance
Volume 69, Issue 1, pages 405–452, February 2014
How to Cite
RYTCHKOV, O. (2014), Asset Pricing with Dynamic Margin Constraints. The Journal of Finance, 69: 405–452. doi: 10.1111/jofi.12100
- Issue published online: 7 JAN 2014
- Article first published online: 7 JAN 2014
- Accepted manuscript online: 17 SEP 2013 03:04AM EST
- Manuscript Accepted: 9 JUL 2013
- Manuscript Received: 18 AUG 2011
This paper provides a novel theoretical analysis of how endogenous time-varying margin requirements affect capital market equilibrium. I find that margin requirements, when there are no other market frictions, reduce the volatility and correlation of returns as well as the risk-free rate, but increase the market price of risk, the risk premium, and the price of risky assets. Furthermore, margin requirements generate a strong cross-sectional dispersion of stock return volatilities. The results emphasize that a general equilibrium analysis may reverse the conclusions of a partial equilibrium analysis often employed in the literature.