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Asset Pricing with Dynamic Margin Constraints

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  • OLEG RYTCHKOV

Abstract

type="main"> 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.

Suggested Citation

  • Oleg Rytchkov, 2014. "Asset Pricing with Dynamic Margin Constraints," Journal of Finance, American Finance Association, vol. 69(1), pages 405-452, February.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:1:p:405-452
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    File URL: http://hdl.handle.net/10.1111/jofi.12100
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