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Stock margins and the conditional probability of price reversals

Author

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  • Paul Kofman
  • James T. Moser

Abstract

Levels of required margin are shown to be positively related to autocorrelations in stock returns, a result which implies that the probability of nontrading increases when margin levels increase. Frequencies of stock-price reversals are studied to determine the effect of margin requirements on participation by information traders. If price reversals are negatively (positively) related to high levels of margin, then relative proportions of information traders increase (decrease). We find that reversals occur more. frequently prior to the regulation of margin in 1934. This date coincides with a general increase in the level of margins. Our logit specifications indicate that reversal probabilities are conditional on the level of margin. Controls for the effects of time and the introduction of regulation do not alter this conclusion. The results suggest that margin costs reduce stock market participation with a lesser effect on information based trading.
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Suggested Citation

  • Paul Kofman & James T. Moser, 1993. "Stock margins and the conditional probability of price reversals," Working Paper Series, Issues in Financial Regulation 93-5, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhfi:93-5
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    Cited by:

    1. Tibor Neugebauer & Sascha Füllbrunn, 2013. "Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations," LSF Research Working Paper Series 13-14, Luxembourg School of Finance, University of Luxembourg.
    2. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    3. Füllbrunn, Sascha & Neugebauer, Tibor, 2022. "Testing market regulations in experimental asset markets – The case of margin purchases," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1160-1183.
    4. 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, vol. 10(4), pages 549-574, September.

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