Leverage and Market Stability: The Role of Margin Rules and Price Limits
AbstractThe authors show that, when some investors hold levered portfolios by engaging in margin borrowing, repeated rounds of trading can result in market instability--in the sense that prices can move rationally--even in the absence of any change in fundamentals. They show this with a simple model in which all agents are rational and symmetrically informed. The authors discuss welfare implications of price stability and explore the effects of market composition and market trading rules on the stability of the market. A major result of this article is that price limits might enhance market stability by excluding potentially destabilizing market prices. Copyright 1998 by University of Chicago Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 71 (1998)
Issue (Month): 2 (April)
Contact details of provider:
Web page: http://www.journals.uchicago.edu/JB/
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Wang, Dingyan & Chong, Terence Tai-Leung & Chan, Wing Hong, 2014. "Price Limits and Stock Market Volatility in China," MPRA Paper 54146, University Library of Munich, Germany.
- K. John & A. Koticha & R. Narayanan, . "Margin Rules, Informed Trading in Derivatives and Price Dynamics," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-047, New York University, Leonard N. Stern School of Business-.
- M. Kabir Hassan & Anisul M. Islam & Syed Basher, 2003.
"Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market,"
- M. Kabir Hassan & Anisul M. Islam & Syed Abul Basher, 2000. "Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market," Working Papers 2002_6, York University, Department of Economics, revised Jun 2002.
- Levy, Tamir & Yagil, Joseph, 2005. "Observed versus theoretical prices under price limit regimes," Journal of Economics and Business, Elsevier, vol. 57(3), pages 208-237.
- Xiong, Wei, 2001. "Convergence trading with wealth effects: an amplification mechanism in financial markets," Journal of Financial Economics, Elsevier, vol. 62(2), pages 247-292, November.
- Yeh, Chia-Hsuan & Yang, Chun-Yi, 2010. "Examining the effectiveness of price limits in an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2089-2108, October.
- Oehmke, Martin, 2014. "Liquidating illiquid collateral," Journal of Economic Theory, Elsevier, vol. 149(C), pages 183-210.
- Antonio E. Bernardo & Ivo Welch, 2004.
"Liquidity and Financial Market Runs,"
The Quarterly Journal of Economics,
MIT Press, vol. 119(1), pages 135-158, February.
- Bernardo, Antonio E. & Welch, Ivo, 2013. "Leverage and preemptive selling of financial institutions," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 123-151.
- Sheng Guo, 2014. "Margin Requirements and Portfolio Optimization: A Geometric Approach," Working Papers 1406, Florida International University, Department of Economics.
- Gong-meng Chen & Oliver Rui & Steven Wang, 2005. "The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 159-182, September.
- Henke, Harald & Voronkova, Svitlana, 2005. "Price limits on a call auction market: Evidence from the Warsaw Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 14(4), pages 439-453.
- James Brugler & Oliver Linton, 2014. "Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?," CeMMAP working papers CWP07/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Marcelo Fernandes & Marco Aur�lio dos Santos Rocha, 2006.
"Are Price Limits on Futures Markets That Cool? Evidence from the Brazilian Mercantile and Futures Exchange,"
579, Queen Mary, University of London, School of Economics and Finance.
- Fernandes, Marcelo & Rocha, Marco Aurélio dos Santos, 2006. "Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange," Economics Working Papers (Ensaios Economicos da EPGE) 630, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
- Bernardo, Antonio E. & Welch, Ivo, 2002.
"Financial Market Runs,"
University of California at Los Angeles, Anderson Graduate School of Management
qt0zd313hf, Anderson Graduate School of Management, UCLA.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
- Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 2002. "Feedback and the Success," University of California at Los Angeles, Anderson Graduate School of Management qt2b82s539, Anderson Graduate School of Management, UCLA.
- Levy, Tamir & Qadan, Mahmod & Yagil, Joseph, 2013. "Predicting the limit-hit frequency in futures contracts," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 141-148.
- Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division).
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.