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Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions

Author

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  • Prachi Deuskar
  • Nitin Kumar
  • Jeramia Allan Poland

Abstract

Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (i) lower S&P 500 returns, (ii) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (iii) higher macro, financial, and policy uncertainty, (iv) lower interest rates, (v) tighter lending standards by banks, and (vi) lower intermediary equity capital. High margin capacity is a precursor, not a response, to borrowing and intermediary constraints and higher volatility. It typically arises when levered investors with profitable past positions limit their leverage. We interpret that it reflects informed investors’ conservatism ahead of bad times.

Suggested Citation

  • Prachi Deuskar & Nitin Kumar & Jeramia Allan Poland, 2020. "Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions," Review of Finance, European Finance Association, vol. 24(5), pages 1039-1077.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:5:p:1039-1077.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa006
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    More about this item

    Keywords

    Margin debt; Economic conditions;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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