Margin requirements and stock market volatility

Ferris, Stephen P.; Chance, Don M.

doi:10.1016/0165-1765(88)90125-5

Cited by 37 publications

(18 citation statements)

References 5 publications

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“…The results, though, did not seem to be robust with respect to the time period chosen (Salinger 1989). Also, a number of studies found that margin requirements have no significant impact on stock price volatility (Moore 1966;Ferris and Chance 1988;Schwert 1989;Salinger 1989;Kupiec 1989;Hsieh and Miller 1991).…”

Section: Introductionmentioning

confidence: 75%

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Weller

2002

J Econ Finan

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Rapidly rising stock prices in the 1990s raised worries about potential inflationary or destabilizing effects. The use of initial margin debt requirements by the Federal Reserve was proposed to reduce the run-up in stock prices. This paper evaluates the likely impact of margin debt requirements on stock valuations. The results suggest that higher margin requirements would have had no impact on stock market valuations in the 1990s, Moreover, other forms of consumer credit are relatively more important in determining household equity positions than margin debt, making the control of margin debt not an obvious public policy choice.

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Section: Introductionmentioning

confidence: 75%

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Weller

2002

J Econ Finan

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“…This would increase the stock price volatility. Ferris and Chance (1988) postulate that margin reductions permit more investors to enter the market, bringing in with them more heterogeneous information. Therefore, investors are less likely to engage in unidirectional transactions that may contribute to higher volatilities.…”

Section: Optimal Margined Portfolios When Uniform Margin Rate Is Changedmentioning

confidence: 99%

“…Most researchers conclude that the margin requirements, stipulated in Regulation T by the Federal Reserve System, had little or even positive impact on stock market volatility (Ferris and Chance, 1988;Hsieh and Miller, 1990;Kumar et al, 1991;Kupiec, 1989;Salinger, 1989;Schwert, 1989). The lone researcher taking the other side of the debate is Gikas Hardouvelis who, in a series of papers (Hardouvelis, 1988(Hardouvelis, , 1990Hardouvelis and Theodossiou, 2002), claims that margin requirements were indeed instrumental in reducing market volatilities, through the "pyramidingdepyramiding" process fueled by speculative investors (Garbade, 1982).…”

mentioning

confidence: 99%

“…Some works cited above contain the seemingly counterfactual evidence suggesting a positive relationship between margin requirements and market volatilities (Ferris and Chance, 1988;Kumar et al, 1991). Several authors have proposed various theories that could predict such a positive relationship, such as coporate financing leverage response (Goldberg, 1985), heteregeneous information possessed by market participants (Ferris and Chance, 1988), market liquidity effect (Kumar et al, 1991), investor heterogeneity in risk tolerance (Kupiec and Sharpe, 1991), and hetereogeneous background liquidity shocks (Wang, 2013).…”

mentioning

confidence: 99%

“…Several authors have proposed various theories that could predict such a positive relationship, such as coporate financing leverage response (Goldberg, 1985), heteregeneous information possessed by market participants (Ferris and Chance, 1988), market liquidity effect (Kumar et al, 1991), investor heterogeneity in risk tolerance (Kupiec and Sharpe, 1991), and hetereogeneous background liquidity shocks (Wang, 2013). To complement these works, our analysis 4 The definition of margin in stock market is the minimum percentage of equity an investor must deposit in his account to secure the loan that is used towards purchasing or maintaining his stock holidngs.…”

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confidence: 99%

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Margin requirements and portfolio optimization: A geometric approach

Guo

2014

J Asset Manag

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Using geometric illustrations, we investigate what implications of portfolio optimization in equilibrium can be generated by the simple mean-variance framework, under margin borrowing restrictions. First, we investigate the case of uniform marginability on all risky assets.It is shown that changing from unlimited borrowing to margin borrowing shifts the market portfolio to a riskier combination, accompanied by a higher risk premium and a lower price of risk. With the linear risk-return preference, more stringent margin requirements lead to a riskier market portfolio, contrary to the conventional belief. Second, we investigate the effects of differential marginability on portfolio optimization by allowing only one of the risky assets to be pledged as collateral. It is shown that the resulting optimal portfolio is not always tilted towards holding more of the marginable asset, when the margin requirement is loosened.

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Margin Regulation and Stock Market Response: Further Evidence From the U.S. And Some Pacific‐basin Countries

Lee¹,

Yoo²

1991

Rev Financ Econ

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Margin requirements and stock market volatility

Cited by 37 publications

References 5 publications

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Margin requirements and portfolio optimization: A geometric approach

Margin Regulation and Stock Market Response: Further Evidence From the U.S. And Some Pacific‐basin Countries

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