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

Weller, Christian E.

doi:10.1007/bf02744448

Cited by 3 publications

(2 citation statements)

References 26 publications

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“…Second, little empirical evidence shows the effect of margin requirements on market volatility/risk (e.g. Kupiec, 1998; Weller, 2002; Guo et al , 2011). This further indicates the inappropriate use of market risk control as an objective for margin setting.…”

Section: Setting Margins For Margin Buyingmentioning

confidence: 99%

Setting margins for margin buying in China: balancing the trade-off between liquidity and prudence

Hong

Bian

2020

IJOEM

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PurposeThe purpose of this paper is to propose a new dynamic margin setting method for margin buying in China and evaluate the validity of its performance with the current margin system adopted by stock exchanges in extreme episodes.Design/methodology/approachThis paper adopts the dynamic conceptual model of Huang et al. (2012) (which is based on Figlewski (1984)) but incorporates Markov chain to describe the data generation process of stock price changes. By applying the model to margin buying contracts for the period of March 16, 2018, to May 2, 2018 (baseline study) and June 15, 2015, to July 27, 2015 (robustness test), the model’s superiority to the current margin system adopted by stock exchanges is also tested.FindingsThe paper has several important findings. First, the margins derived by this system vary with market conditions, rising (declining) when stock prices go down (up), and are generally lower than the requirements imposed by stock exchanges. Second, this margin system induces lower overall percentage of costs than that adopted by stock exchanges. Third, parameter estimation plays an important role on shaping empirical results.Research limitations/implicationsThe primary limitation of this paper lies in the fact that it does not solve the issue of determining optimal parameters of the Markov chain model. On the implication of findings, policy-makers and regulators on supervising margin buying activities may need a tune-up on the current margin system which features static margin requirements. Dynamic margins that incorporate market factors are virtually useful to balance the trade-off between liquidity and prudence.Originality/valueTo the best of the authors’ knowledge, this study is the first of its kind to develop a dynamic margin setting method for margin buying in China, aiming to balance the trade-off between liquidity and prudence. It not only takes into account the uniqueness of Chinese markets but also allows for time variations in both initial and maintenance margins.

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Section: Setting Margins For Margin Buyingmentioning

confidence: 99%

Setting margins for margin buying in China: balancing the trade-off between liquidity and prudence

Hong

Bian

2020

IJOEM

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“…2. For example, Kumar et al (1991), Hsieh and Miller (1990), Fortune (2001), Weller, 2002) and Schwert (1989). Hardouvelis (1990) does find them effective.…”

Section: Speculative Excessmentioning

confidence: 99%

Speculative excess and the Federal Reserve's response

Huston

Spencer²

2009

Studies in Economics and Finance

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Purpose -The purpose of this paper is to develop a single variable indicative of the state of market speculation; to determine whether the Federal Reserve has attempted to quell speculation when it has been most rampant and whether such attempts were successful. Design/methodology/approach -The paper examine the literature on market "bubbles" and the Federal Reserve's treatment of them; to determine a single variable reflective of market speculation via principle components integration; to examine the Federal Reserve's interaction with market speculation by estimating a vector autoregression version of the Taylor rule. Findings -It is possible to construct a single variable representative of market speculation, termed the index of speculative excess that correlates well with standard views of market excess; the Federal Reserve did attempt to retard market speculation during the three major bull markets of the past century; monetary policy did little to inhibit market speculation. Originality/value -Highly original in the construction of a single variable reflective of market speculation; joins the ongoing debate as to the extent of Federal Reserve concern with speculative activity and the Fed's poor record of accomplishment in this area.

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An empirical analysis of margin debt

Domian

Racine

2006

International Review of Economics & Finance

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

Cited by 3 publications

References 26 publications

Setting margins for margin buying in China: balancing the trade-off between liquidity and prudence

Setting margins for margin buying in China: balancing the trade-off between liquidity and prudence

Speculative excess and the Federal Reserve's response

An empirical analysis of margin debt

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