Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70137
Authors: 
Füllbrunn, Sascha
Neugebauer, Tibor
Year of Publication: 
2012
Series/Report no.: 
Jena Economic Research Papers 2012,058
Abstract: 
In financial markets, professional traders leverage their trades because it allows to trade larger positions with less margin. Violating margin requirements, however, triggers a margin call and open positions are automatically covered until requirements are met again. What impact does margin trading have on the price process and on liquidity in financial asset markets? Since empirical evidence is mixed, we consider this question using experimental asset markets. Starting from an empirically relevant situation where margin purchasing and short selling is permitted, we ban margin purchases and/or short sales using a 2x2 factorial design to a allow for a comparative static analysis. Our results indicate that a ban on margin purchases fosters efficient pricing by narrowing price deviations from fundamental value accompanied with lower volatility and a smaller bid-ask-spread. A ban on short sales, however, tends to distort efficient pricing by widening price deviations accompanied with higher volatility and a large spread.
Subjects: 
Leverage
asset Market
price bubble
experimental finance
JEL: 
C92
D70
G12
Document Type: 
Working Paper

Files in This Item:
File
Size
446.97 kB





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