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 ()
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Fortune, 1995. "Stocks, bonds, options, futures, and portfolio insurance: a rose by any other name," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jul, pages 25-46.
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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
- Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfoliosâ€™ returns: The role of the financial crisis," Working Papers, Business School - Economics, University of Glasgow 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
- 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 RamÃ³n MartÃnez Resano & Liliana Toledo FalcÃ³n, 2002. "Futuros sobre acciones: demanda e implicaciones sobre los mercados de renta variable," Banco de Espaï¿½a Working Papers 0218, Banco de Espaï¿½a.
- Poledna, Sebastian & Thurner, Stefan & Farmer, J. Doyne & Geanakoplos, John, 2014. "Leverage-induced systemic risk under Basle II and other credit risk policies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 42(C), pages 199-212.
- D. Matsypura & V.G. Timkovsky, 2013. "Integer programs for margining option portfolios by option spreads with more than four legs," Computational Management Science, Springer, vol. 10(1), pages 51-76, February.
- Roche, HervÃ© & Tompaidis, Stathis & Yang, Chunyu, 2013. "Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(3), pages 775-796.
- Florackis, Chris & Kontonikas, Alexandros & Kostakis, Alexandros, 2013.
"Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis,"
SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE)
2013-58, Scottish Institute for Research in Economics (SIRE).
- Chris Florackis & Alexandros Kontonikas & Alexandros Kostakisâ€Œ, . "Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis," Working Papers, Business School - Economics, University of Glasgow 2013_13, Business School - Economics, University of Glasgow.
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