Do Security Prices Rise or Fall When Margins Are Raised?- Jean-Marc Bottazzi, Mário R. Páscoa, Guillermo Ramírez

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  • Last update: 17 November 2017
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  • Version: November 14, 2017
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  • Author: Jean-Marc Bottazzi, Mário R. Páscoa, Guillermo Ramírez

Abstract

When repo margins are raised by a central clearing counterparty (CCP),
the impact on security prices depends on whether the market is `long' or
`short'. As both the long and the short must post margins, the price impact
depends on which side is more leveraged: traders long in the security or
those short-selling it. If a raised margin forces more position unwind from
the long than from the short, the price will go down to clear the market.
However, if short positions are more hit then the long ones, a raised haircut
leads to a higher security price!