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Margin requirements across equity-related instruments: how level is the playing field?

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  • Peter Fortune
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    Abstract

    Investors can participate in the returns on the Standard and Poor's 500 composite index in a variety of ways, and these alternatives exist because they differ in important respects. This article assesses one dimension of these differences-margin requirements. ; Focusing on equity-related instruments, the author develops a model to simulate the values arising from several identical positions obtained by combinations of stocks and stock derivatives. The results are then used to assess the costs of margin requirements on alternative strategies. The primary conclusion is that the playing field is more level than a cursory focus on initial margin requirements might indicate. The costs associated with margin requirements on equities or stock indexes are essentially fixed costs. On the other hand, costs of margin requirements on derivatives, particularly on futures contracts, have a low fixed cost component but are more sensitive to the price of the underlying security. Investors may be choosing their strategies based on their tolerance for risk and may be sorting themselves into different markets, allowing all instruments to be financially viable.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2003)
    Issue (Month): ()
    Pages: 31-50

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    Handle: RePEc:fip:fedbne:y:2003:p:31-50

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    Related research

    Keywords: Margins (Security trading);

    References

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    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.:
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    1. George Sofianos, 1988. "Margin requirements on equity instruments," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 47-60.
    2. Peter Fortune, 1999. "Are stock returns different over weekends? a jump diffusion analysis of the "weekend effect"," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-19.
    3. Cathy E. Minehan & Katerina Simons, 1995. "Managing risk in the 90's: what should you be asking about derivatives?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-25.
    4. Arturo Estrella, 1988. "Consistent margin requirements: are they feasible?," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 61-79.
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    Cited by:
    1. Paul Willen & Felix Kubler, 2006. "Collateralized Borrowing And Life-Cycle Portfolio Choice," 2006 Meeting Papers 578, Society for Economic Dynamics.

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