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Animal Spirits, Margin Requirements, and Stock Price Volatility

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  • Kupiec, Paul H
  • Sharpe, Steven A

Abstract

A simple overlapping generations model is used to characterize the effects of initial margin requirements in the volatility of risky asset prices. Investors are assumed to exhibit heterogenous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial marginal requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economywide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs. Copyright 1991 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 2 (June)
Pages: 717-31

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Handle: RePEc:bla:jfinan:v:46:y:1991:i:2:p:717-31

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Cited by:
  1. Sheng Guo, 2014. "Margin Requirements and Portfolio Optimization: A Geometric Approach," Working Papers 1406, Florida International University, Department of Economics.
  2. Lillyn L. Teh & Werner F. M. de Bondt, 1997. "Herding Behavior and Stock Returns: An Exploratory Investigation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(II), pages 293-324, June.
  3. Wen-Chung Guo & Frank Yong Wang & Ho-Mou Wu, 2009. "Financial Leverage and Market Volatility with Diverse Beliefs," Finance Working Papers 22887, East Asian Bureau of Economic Research.
  4. Paul Kupiec, 1998. "Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?," Journal of Financial Services Research, Springer, vol. 13(3), pages 231-255, June.
  5. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
  6. G. William Schwert, 2001. "Stock Volatility in the New Millennium: How Wacky Is Nasdaq?," NBER Working Papers 8436, National Bureau of Economic Research, Inc.
  7. Hsin, Chin-Wen & Guo, Wen-Chung & Tseng, Seng-Su & Luo, Wen-Chih, 2003. "The impact of speculative trading on stock return volatility: the evidence from Taiwan," Global Finance Journal, Elsevier, vol. 14(3), pages 243-270, December.
  8. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
  9. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer, vol. 47(2), pages 337-364, June.

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