Contagious Margin Calls: How COVID-19 Threatened Global Stock Market Liquidity

The outbreak of the COVID-19 pandemic caused some of the largest - and fastest - market dislocations in modern history. During the outbreak, liquidity quickly evaporated in a coordinated fashion across global markets. We show a sudden increase in margin requirements during the pandemic is correlated with the withdrawal of global liquidity suppliers, driving a pro-cyclical downwards liquidity spiral. These effects are concentrated in securities most exposed to high frequency market makers, consistent with the binding nature of increased capital constraints.