Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257654 
Year of Publication: 
2019
Citation: 
[Journal:] International Journal of Financial Studies [ISSN:] 2227-7072 [Volume:] 7 [Issue:] 4 [Article No.:] 56 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-23
Publisher: 
MDPI, Basel
Abstract: 
In this paper, which is the third installment of the author's trilogy on margin loan pricing, we analyze 1367 monthly observations of the U.S. broker call money rate, e.g., the interest rate at which stockbrokers can borrow to fund their margin loans to retail clients. We describe the basic features and mean-reverting behavior of this series and juxtapose the empirically-derived laws of motion with the author's prior theories of margin loan pricing (Garivaltis 2019a, 2019b). This allows us to derive stochastic differential equations that govern the evolution of the margin loan interest rate and the leverage ratios of sophisticated brokerage clients (namely, continuous-time Kelly gamblers). Finally, we apply Merton's (1974) arbitrage theory of corporate liability pricing to study theoretical constraints on the risk premia that could be generated in the market for call money. Apparently, if there is no arbitrage in the U.S. financial markets, the implication is that the total volume of call loans must constitute north of 70 % of the value of all leveraged portfolios.
Subjects: 
arbitrage pricing
broker call rate
call money rate
Kelly criterion
margin loans
mean-reverting processes
monopoly pricing
net interest margin
risk premium
vasicek model
JEL: 
C22
C58
D42
D53
E17
E31
E41
G17
G21
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.