Margin requirements, margin loans, and margin rates: practice and principles
AbstractThe Board of Governors of the Federal Reserve System establishes initial margin requirements under Regulations T, U, and X. Recent margin loan increases, both in aggregate value and relative to market capitalization, have rekindled the debate about using margin requirements as an instrument to affect the prices of common stocks. Proponents of a more active margin requirement policy see the regulations as instruments for affecting the level and volatility of stock prices by influencing investors' demand for common stocks. Others believe that the announcement effects of increased margin requirements would have a stabilizing effect on the stock market and on the economy. ; This article discusses the historical background, accounting mechanics, regulation, and economic principles of margin lending. The author analyzes the data on the volume of margin loans, and he describes the history and practice of margin requirements as well the accounting framework. He assesses the extent to which initial margin requirements restrict the amount of margin lending, and he reviews the economics of margin loans, focusing on margin loans to the customers of broker-dealers. The author also develops a model of the link between the value of the put option embedded in margin loans and the margin loan rate, which he applies to determine the characteristics that should explain the high margin loan rates that typically prevail.
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Bibliographic InfoArticle provided by Federal Reserve Bank of Boston in its journal New England Economic Review.
Volume (Year): (2000)
Issue (Month): Sep ()
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- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why Margin Requirements Made Sense in 1934
by Mike Guttentag in The conglomerate on 2008-10-30 22:06:19
- Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011.
"Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis,"
SIRE Discussion Papers
2011-31, Scottish Institute for Research in Economics (SIRE).
- Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
- Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, . "Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis," Working Papers 2013_13, Business School - Economics, University of Glasgow.
- Guanghui Huang & Wenting Xin & Weiqing Gu, 2012. "Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral," Papers 1202.4913, arXiv.org, revised Feb 2012.
- Jose Ramón Martínez Resano & Liliana Toledo Falcón, 2002. "Futuros sobre acciones: demanda e implicaciones sobre los mercados de renta variable," Banco de Espaï¿½a Working Papers 0218, Banco de Espa�a.
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