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Margin requirements, volatility, and market integrity: what have we learned since the crash?

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  • Paul H. Kupiec

Abstract

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A relatively comprehensive review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of "excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1997-22.

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Date of creation: 1997
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Handle: RePEc:fip:fedgfe:1997-22

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Keywords: Securities;

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References

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  4. Grube, R Corwin & Joy, O Maurice & Panton, Don B, 1979. "Market Responses to Federal Reserve Changes in the Initial Margin Requirement," Journal of Finance, American Finance Association, vol. 34(3), pages 659-74, June.
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  7. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
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  9. Gary Gorton & George Pennacchi, 1991. "Security Baskets and Index-Linked Securities," NBER Working Papers 3711, National Bureau of Economic Research, Inc.
  10. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
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  18. Gikas A. Hardouvelis, 1988. "Margin requirements and stock market volatility," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 80-89.
  19. Kenneth C. Froewiss, 1978. "GNMA futures: stabilizing or destabilizing?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-29.
  20. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
  21. Hardouvelis, Gikas A & Kim, Dongcheol, 1995. "Price Volatility and Futures Margins," CEPR Discussion Papers 1263, C.E.P.R. Discussion Papers.
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  25. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
  26. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  27. Roger Craine., 1992. "Are Futures Margins Adequate?," Economics Working Papers 92-192, University of California at Berkeley.
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  29. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
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  32. Grube, R. Corwin & Joy, O. Maurice & Howe, John S., 1987. "Some empirical evidence on stock returns and security credit regulation in the OTC equity market," Journal of Banking & Finance, Elsevier, vol. 11(1), pages 17-31, March.
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  35. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
  36. Paul H. Kupiec & A. Patricia White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Finance and Economics Discussion Series 96-11, Board of Governors of the Federal Reserve System (U.S.).
  37. Day, Theodore E & Lewis, Craig M, 1997. "Initial Margin Policy and Stochastic Volatility in the Crude Oil Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 303-32.
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Cited by:
  1. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer, vol. 47(2), pages 337-364, June.
  2. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. 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.
  4. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The history of cyclical macroprudential policy in the United States," Finance and Economics Discussion Series 2013-29, Board of Governors of the Federal Reserve System (U.S.).
  5. Raymond Knott & Marco Polenghi, 2006. "Assessing central counterparty margin coverage on futures contracts using GARCH models," Bank of England working papers 287, Bank of England.
  6. Wen-Chung Guo & Frank Yong Wang & Ho-Mou Wu, 2009. "Financial Leverage and Market Volatility with Diverse Beliefs," Finance Working Papers 22887, East Asian Bureau of Economic Research.
  7. Domian, Dale L. & Racine, Marie D., 2006. "An empirical analysis of margin debt," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 151-163.

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