IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v75y2015icp54-68.html
   My bibliography  Save this article

Margin regulation and volatility

Author

Listed:
  • Brumm, Johannes
  • Grill, Michael
  • Kubler, Felix
  • Schmedders, Karl

Abstract

An infinite-horizon asset-pricing model with heterogeneous agents and collateral constraints can explain why adjustments in stock market margins under US Regulation T had an economically insignificant impact on market volatility. In the model, raising the margin requirement for one asset class may barely affect its volatility if investors have access to another, unregulated class of collateralizable assets. Through spillovers, however, the volatility of the other asset class may substantially decrease. A very strong dampening effect on all assets׳ return volatilities can be achieved by a countercyclical regulation of all markets.

Suggested Citation

  • Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    • Handle: RePEc:eee:moneco:v:75:y:2015:i:c:p:54-68
    DOI: 10.1016/j.jmoneco.2014.12.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304393214001834
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmoneco.2014.12.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. repec:fth:starer:98-25 is not listed on IDEAS
    3. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    4. Hardouvelis, Gikas A, 1990. "Margin Requirements, Volatility, and the Transitory Components of Stock Prices," American Economic Review, American Economic Association, vol. 80(4), pages 736-762, September.
    5. Thomas Gale Moore, 1966. "Stock Market Margin Requirements," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 158-158.
    6. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
    7. Robert J. Barro & Tao Jin, 2011. "On the Size Distribution of Macroeconomic Disasters," Econometrica, Econometric Society, vol. 79(5), pages 1567-1589, September.
    8. YiLi Chien & Hanno Lustig, 2010. "The Market Price of Aggregate Risk and the Wealth Distribution," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1596-1650, April.
    9. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzalecki, 2014. "How Much Would You Pay to Resolve Long-Run Risk?," American Economic Review, American Economic Association, vol. 104(9), pages 2680-2697, September.
    10. repec:fth:starer:9825 is not listed on IDEAS
    11. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2015. "Collateral Requirements And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 1-25, February.
    12. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    13. Dan Vu Cao, 2010. "Collateral Shortages, Asset Price And Investment Volatility With Heterogeneous Beliefs," 2010 Meeting Papers 1233, Society for Economic Dynamics.
    14. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    15. Adam Ashcraft & Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Two Monetary Tools: Interest Rates and Haircuts," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 143-180, National Bureau of Economic Research, Inc.
    16. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 631-649.
    17. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    18. Coen-Pirani, Daniele, 2005. "Margin requirements and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 449-475, March.
    19. Nicolae Gârleanu & Lasse Heje Pedersen, 2011. "Margin-based Asset Pricing and Deviations from the Law of One Price," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1980-2022.
    20. S. Rao Aiyagari & Mark Gertler, 1999. ""Overreaction" of Asset Prices in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 3-35, January.
    21. Paul Kupiec, 1998. "Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(3), pages 231-255, June.
    22. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
    23. Peter Fortune, 2000. "Margin requirements, margin loans, and margin rates: practice and principles," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 19-44.
    24. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-487, June.
    25. Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
    26. Kupiec, Paul H & Sharpe, Steven A, 1991. "Animal Spirits, Margin Requirements, and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 46(2), pages 717-731, June.
    27. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-1244, September.
    28. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York, revised 01 Feb 2015.
    29. Georgy Chabakauri, 2013. "Dynamic Equilibrium with Two Stocks, Heterogeneous Investors, and Portfolio Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3104-3141.
    30. Gikas A. Hardouvelis & Panayiotis Theodossiou, 2002. "The Asymmetric Relation Between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets," The Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1525-1560.
    31. Felix Kubler & Karl Schmedders, 2003. "Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral," Econometrica, Econometric Society, vol. 71(6), pages 1767-1793, November.
    32. James M. Poterba & Andrew A. Samwick, 1995. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 295-372.
    33. Robert J. Barro & Jose F. Ursua, 2008. "Macroeconomic Crises since 1870," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 255-350.
    34. White, Eugene N, 1990. "The Stock Market Boom and Crash of 1929 Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 67-83, Spring.
    35. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715, Cowles Foundation for Research in Economics, Yale University.
    36. Annette Vissing-Jørgensen & Orazio P. Attanasio, 2003. "Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion," American Economic Review, American Economic Association, vol. 93(2), pages 383-391, May.
    37. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2015. "Collateral Requirements And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1-25, February.
    38. Oleg Rytchkov, 2014. "Asset Pricing with Dynamic Margin Constraints," Journal of Finance, American Finance Association, vol. 69(1), pages 405-452, February.
    39. Brumm, Johannes & Grill, Michael, 2014. "Computing equilibria in dynamic models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 142-160.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pengfei Wang & Jing Zhou & Jianjun Miao, 2015. "Housing Bubbles and Policy Analysis," 2015 Meeting Papers 1056, Society for Economic Dynamics.
    2. Yanxi Li & Siu Kai Choy & Mingzhu Wang, 2022. "The potential built‐in supply effect from margin trading in the Chinese stock market," The Financial Review, Eastern Finance Association, vol. 57(4), pages 835-861, November.
    3. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2015. "Collateral Requirements And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 1-25, February.
    4. Hui Ying Sng & Yang Zhang & Huanhuan Zheng, 2020. "Margin trade, short sales and financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(3), pages 673-702, July.
    5. Chabakauri, Georgy & Han, Brandon Yueyang, 2020. "Collateral constraints and asset prices," Journal of Financial Economics, Elsevier, vol. 138(3), pages 754-776.
    6. Clerc, Laurent & Giovannini, Alberto & Langfield, Sam & Peltonen, Tuomas A. & Portes, Richard & Scheicher, Martin, 2016. "Indirect contagion: the policy problem," ESRB Occasional Paper Series 9, European Systemic Risk Board.
    7. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    8. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    9. Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2014. "Over-the-Counter Trade and the Value of Assets as Collateral," Working Papers 143, University of California, Davis, Department of Economics.
    10. Laurent Clerc & Alberto Giovannini & Sam Langfield & Tuomas Peltonen & Richard Portes & Martin Scheicher, 2016. "Indirect contagion: the policy problem," ESRB Occasional Paper Series 09, European Systemic Risk Board.
    11. Suzuki, Shiba, 2018. "Inequality and asset fire sales," MPRA Paper 90906, University Library of Munich, Germany.
    12. Senarathne, Chamil W., . "The Information Flow Interpretation of Margin Debt Value Data: Evidence from New York Stock Exchange," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 26(1).
    13. Bistra Radeva, 2019. "Stock price fluctuations and GARCH modelling of stock market indexes," Economics and computer science, Publishing house "Knowledge and business" Varna, issue 3, pages 6-19.
    14. Magill, Michael & Quinzii, Martine, 2015. "Prices and investment with collateral and default," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 111-132.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2012. "Margin Requirements and Asset Prices," 2012 Meeting Papers 533, Society for Economic Dynamics.
    2. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2015. "Collateral Requirements And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 1-25, February.
    3. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    4. Tyler Abbot, 2017. "General Equilibrium Under Convex Portfolio Constraints and Heterogeneous Risk Preferences," Papers 1706.05877, arXiv.org, revised Jun 2018.
    5. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 337-364, June.
    6. Sheng Guo, 2014. "Margin requirements and portfolio optimization: A geometric approach," Journal of Asset Management, Palgrave Macmillan, vol. 15(3), pages 191-204, June.
    7. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "A Model of Monetary Policy and Risk Premia," Journal of Finance, American Finance Association, vol. 73(1), pages 317-373, February.
    8. Gregory Phelan, 2017. "Collateralized borrowing and increasing risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 471-502, February.
    9. Chabakauri, Georgy, 2015. "Asset pricing with heterogeneous preferences, beliefs, and portfolio constraints," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 21-34.
    10. Chabakauri, Georgy & Han, Brandon Yueyang, 2020. "Collateral constraints and asset prices," Journal of Financial Economics, Elsevier, vol. 138(3), pages 754-776.
    11. Gianluca Femminis, 2019. "Risk aversion heterogeneity and the investment–uncertainty relationship," Journal of Economics, Springer, vol. 127(3), pages 223-264, August.
    12. Feixue Gong & Gregory Phelan, 2020. "Debt collateralization, capital structure, and maximal leverage," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 579-605, September.
    13. Amir Akbari & Francesca Carrieri & Aytek Malkhozov, 2017. "Reversals in Global Market Integration and Funding Liquidity," International Finance Discussion Papers 1202, Board of Governors of the Federal Reserve System (U.S.).
    14. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    15. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    16. Fostel, Ana & Geanakoplos, John, 2012. "Why does bad news increase volatility and decrease leverage?," Journal of Economic Theory, Elsevier, vol. 147(2), pages 501-525.
    17. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
    18. Buss, Adrian & Dumas, Bernard & Uppal, Raman & Vilkov, Grigory, 2016. "The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 25-43.
    19. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
    20. Bian, Jiangze & Da, Zhi & He, Zhiguo & Lou, Dong & Shue, Kelly & Zhou, Hao, 2021. "Margin trading and leverage management," LSE Research Online Documents on Economics 118851, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Collateral constraints; General equilibrium; Heterogeneous agents; Margin requirements; Regulation T;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:75:y:2015:i:c:p:54-68. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.