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Asset Pricing with Dynamic Margin Constraints
Author(s) -
RYTCHKOV OLEG
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12100
Subject(s) - margin (machine learning) , economics , capital asset pricing model , security market line , volatility (finance) , econometrics , consumption based capital asset pricing model , risk premium , partial equilibrium , general equilibrium theory , stock market , financial economics , microeconomics , computer science , paleontology , horse , machine learning , biology
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.