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Animal spirits, margin requirements, and stock price volatility

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  • Paul Kupiec
  • Steve Sharpe

Abstract

A simple overlapping generations model is used to characterize the effects of initial margin requirements in the volatility of risky asset prices. Investors are assumed to exhibit heterogenous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial marginal requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economywide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs. Copyright 1991 by American Finance Association.

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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 91.

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Date of creation: 1989
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Handle: RePEc:fip:fedgfe:91

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Related research

Keywords: Margins (Security trading) ; Stock - Prices;

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Cited by:
  1. G. William Schwert, 2001. "Stock Volatility in the New Millennium: How Wacky Is Nasdaq?," NBER Working Papers 8436, National Bureau of Economic Research, Inc.
  2. Paul Kupiec, 1998. "Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?," Journal of Financial Services Research, Springer, vol. 13(3), pages 231-255, June.
  3. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
  4. Sheng Guo, 2014. "Margin Requirements and Portfolio Optimization: A Geometric Approach," Working Papers 1406, Florida International University, Department of Economics.
  5. Lillyn L. Teh & Werner F. M. de Bondt, 1997. "Herding Behavior and Stock Returns: An Exploratory Investigation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(II), pages 293-324, June.
  6. 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.
  7. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
  8. 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.
  9. Hsin, Chin-Wen & Guo, Wen-Chung & Tseng, Seng-Su & Luo, Wen-Chih, 2003. "The impact of speculative trading on stock return volatility: the evidence from Taiwan," Global Finance Journal, Elsevier, vol. 14(3), pages 243-270, December.

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