Margin Requirements, Volatility, and Market Integrity: What Have We Learned since the Crash?

Abstract

This study assesses the state of the policy debate that surrounds the Federal regulation of margin requirements. A relatively comprehensive review of the literature nds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of \excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.

Margin, Short Selling, and Lotteries in Experimental Asset Markets

“…The thought was that trade on credit resulted in over-leveraging, excessive speculation, and increased stock market volatility.? In contrast, Kupiec (1998) argues that the evidence does not indicate that leverage created by margin produces excess volatility. In terms of experimental evidence, Porter and Smith (1995) conclude that margin buying increases the amplitude of the price bubble in their experimental asset markets.…”

Safer Margins for Option Trading: How Accuracy Promotes Efficiency

“…Earlier studies examine the impact of margins separately on markets of stocks and their derivatives. Following a comprehensive survey of theoretical models and empirical evidence, Kupiec (1998) describes earlier findings as contradictory and inconclusive. 1 Some of those studies claim that margin requirements promote instability in stock trading; others conclude that margin requirements have no significant effects on the volatility of share prices or share trading volume.…”

“…2 Those 1. See for example Kupiec [1998] and Kose et al [1997], Garbade [1982], Chowdry and Nanda [1998], Schwert [1989], Salinger [1989], Kupiec [1989], Hsieh and Miller [1990], and Seguin and Jarrell [1993].…”

“…As put by Figlewski (1984), margin on a stock is a loan, while margin on a stock's derivative is a performance bond. According to Kupiec (1998), increased margin requirements on options can increase volatility in the underlying share prices. Empirical margining studies conducted respectively by Fishe et al (1990), Kupiec (1993), Hardouvelis and Kim (1995), and Day and Lewis (1997) fail to establish a systematic relationship between required futures margins and asset liquidity or price volatility in futures contracts written on U.S. indices of stocks, cash market assets, metal contracts, and crude oil.…”

Market efficiency, margin requirements, and risk-taking

“…According to Hardouvelis (1990), higher margin requirements reduce stock market volatility. In contrast, other studies claim that there is no clear evidence that margin regulation mitigates volatility (e.g., see Kupiec, 1997). 3 For example, see Assness, Frazzini, Gormsen, and Pedersen (2020), , Guest, Kothari, and So (2022), Hu, Pan, and Wang (2013), and Lu and Qin (2020).…”