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Leverage constraints and investors' choice of underlyings

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  • Pelster, Matthias

Abstract

This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA), which limits the amount of leverage that retail investors can take on their trading activities. While the intervention successfully reduced leverage-usage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constrained investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests.

Suggested Citation

  • Pelster, Matthias, 2024. "Leverage constraints and investors' choice of underlyings," Journal of Banking & Finance, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jbfina:v:162:y:2024:i:c:s0378426624000700
    DOI: 10.1016/j.jbankfin.2024.107150
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    More about this item

    Keywords

    Trading behavior; Risk-taking; Contracts for difference; Regulatory intervention;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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