Essays on Margin Requirements, Endogenous Illiquidity, and Portfolio Choice
type: CreativeWork
description: This dissertation includes three essays. The first essay studies the effects of margin requirements. The second essay studies how asymmetric information and imperfect competition affect equilibrium illiquidity. The third essay derives new comparative statics results for the distribution of portfolio payoffs. Margin requirements have long been implemented in almost all financial markets and are often used as an important regulatory tool for improving market conditions. However, their economic impact beyond affecting default risk is still largely unknown. The first essay proposes a tractable and flexible equilibrium model with and without information asymmetry to examine how margin requirements on both long and short stock positions affect asset prices, market volatility, market illiquidity and the welfare of market participants. Most of my main results are obtained in closed-form. Contrary to one of the main regulatory goals, I find that margin requirements can significantly emph{increase} market volatility. In addition, margin requirements always increase market illiquidity: as measured by price impact) and can lead to a greater return reversal exactly when they amplify market volatility. I also find that information asymmetry may reverse or dampen the impact of margin requirements. Moreover, margin requirements always make unconstrained investors worse off and can make constrained investors better off. The model provides new testable implications. The second essay proposes a novel and tractable equilibrium model to study how information asymmetry, competition among market makers, and investors' risk aversion affect asset pricing, market illiquidity and welfare. The main innovation is that market makers compete through choosing simultaneously quantities to buy at the bid and to sell at the ask and accordingly market clears separately at the bid and at the ask. Equilibrium bid and ask prices, bid and ask depths, trading volume and market makers' inventory levels are …
abstract: This dissertation includes three essays. The first essay studies the effects of margin requirements. The second essay studies how asymmetric information and imperfect competition affect equilibrium illiquidity. The third essay derives new comparative statics results for the distribution of portfolio payoffs. Margin requirements have long been implemented in almost all financial markets and are often used as an important regulatory tool for improving market conditions. However, their economic impact beyond affecting default risk is still largely unknown. The first essay proposes a tractable and flexible equilibrium model with and without information asymmetry to examine how margin requirements on both long and short stock positions affect asset prices, market volatility, market illiquidity and the welfare of market participants. Most of my main results are obtained in closed-form. Contrary to one of the main regulatory goals, I find that margin requirements can significantly emph{increase} market volatility. In addition, margin requirements always increase market illiquidity: as measured by price impact) and can lead to a greater return reversal exactly when they amplify market volatility. I also find that information asymmetry may reverse or dampen the impact of margin requirements. Moreover, margin requirements always make unconstrained investors worse off and can make constrained investors better off. The model provides new testable implications. The second essay proposes a novel and tractable equilibrium model to study how information asymmetry, competition among market makers, and investors' risk aversion affect asset pricing, market illiquidity and welfare. The main innovation is that market makers compete through choosing simultaneously quantities to buy at the bid and to sell at the ask and accordingly market clears separately at the bid and at the ask. Equilibrium bid and ask prices, bid and ask depths, trading volume and market makers' inventory levels are …
author: Wang, Yajun
language: English (en)
keywords: Business, Bid-Ask Spread, Liquidity, Margin Requirements, Risk Aversion, Short-sales Constraints, Welfare
date published: 2011-01-01T08:00:00Z
date modified: 2026-07-24T06:13:05Z
provider: Washington University in St. Louis
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Washington University in St. Louis

PropertyValue
property ID: DOI
value: 10.7936/K7SF2T7P