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Margin Requirements, Volatility, And The Transitory Component Of Stock Prices

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  • HARDOUVELIS, G.A.

Abstract

Official margin requirements in the U.S. stock market were established in October 1934 to limit the amount of credit available for the purpose of buying stocks. Since then, higher or rising margin requirements are associated with lower stock price volatility, lower excess volatility, and smaller deviations of stock prices from their fundamental values. The results hold throughout the post-1934 period and are not very sensitive to the exclusion of the turbulent depression years from the sample. Thus, margin requirements seem to be an effective policy tool in curbing destabilizing speculation. Copyright 1990 by American Economic Association.

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Bibliographic Info

Paper provided by Columbia - Graduate School of Business in its series Papers with number fb-_88-38.

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Length: 32 pages
Date of creation: 1988
Date of revision:
Handle: RePEc:fth:colubu:fb-_88-38

Contact details of provider:
Postal: U.S.A.; COLUMBIA UNIVERSITY, GRADUATE SCHOOL OF BUSINESS, PAINE WEBBER , New York, NY 10027 U.S.A
Phone: (212) 854-5553
Web page: http://www.columbia.edu/cu/business/
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Keywords: financial market ; price stabilization;

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Cited by:
  1. Moore, Norman H. & Pruitt, Stephen W., 1995. "The firm-size relation and stock market responses to post-1962 changes in Federal Reserve margin levels: Evidence from an exhaustive sample of exchange-listed firms," Economics Letters, Elsevier, Elsevier, vol. 49(3), pages 301-306, September.
  2. Venkat Eleswarapu & Chandrasekar Krishnamurti, 1995. "Do `speculative traders' increase Stock Price Volatility? Empirical evidence from the Bombay Stock Exchange," Finance, EconWPA 9507006, EconWPA.
  3. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer, Springer, vol. 47(2), pages 337-364, June.
  4. 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, New York University, Leonard N. Stern School of Business- 99-047, New York University, Leonard N. Stern School of Business-.
  5. Owen Lamont & Jeremy C. Stein, 1997. "Leverage and House-Price Dynamics in U.S. Cities," NBER Working Papers 5961, National Bureau of Economic Research, Inc.
  6. 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), Swiss Society of Economics and Statistics (SSES), vol. 133(II), pages 293-324, June.
  7. 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.
  8. Paul Kofman & James T. Moser, 2001. "Stock margins and the condition probability of price reversals," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 2-12.
  9. 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.
  10. Zhang, Ting & Li, Honggang, 2013. "Buying on margin, selling short in an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 392(18), pages 4075-4082.
  11. Xiong, Wei, 2001. "Convergence trading with wealth effects: an amplification mechanism in financial markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 62(2), pages 247-292, November.
  12. G. William Schwert, 2001. "Stock Volatility in the New Millennium: How Wacky Is Nasdaq?," NBER Working Papers 8436, National Bureau of Economic Research, Inc.
  13. Ito, Takatoshi & Lin, Wen-Ling, 2001. "Race to the center: competition for the Nikkei 225 futures trade," Journal of Empirical Finance, Elsevier, Elsevier, vol. 8(3), pages 219-242, July.
  14. Rashid, Abdul & Ahmad, Shabbir, 2008. "Badla Financing, Stock Returns and Volatility: The Case Study of Karachi Stock Exchange," MPRA Paper 30487, University Library of Munich, Germany.
  15. Hsu, Yenshan, 1996. "Margin requirements and stock market volatility Another look at the case of Taiwan," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 4(4), pages 409-419, December.
  16. Chatrath, Arjun & Adrangi, Bahram & Allender, Mary, 2001. "The impact of margins in futures markets: evidence from the gold and silver markets," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 41(2), pages 279-294.
  17. Henke, Harald & Voronkova, Svitlana, 2005. "Price limits on a call auction market: Evidence from the Warsaw Stock Exchange," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(4), pages 439-453.
  18. Zhang, Wei David & Seyedian, Mojtaba & Li, Jinliang, 2005. "Margin borrowing, stock returns, and market volatility: Evidence from margin credit balance," Economics Letters, Elsevier, Elsevier, vol. 87(2), pages 273-278, May.
  19. Koutmos, Gregory, 1997. "Feedback trading and the autocorrelation pattern of stock returns: further empirical evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(4), pages 625-636, August.
  20. Alexander, Gordon J. & Ors, Evren & Peterson, Mark A. & Seguin, Paul J., 2004. "Margin regulation and market quality: a microstructure analysis," Journal of Corporate Finance, Elsevier, Elsevier, vol. 10(4), pages 549-574, September.
  21. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.

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