IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

What is the Link Between Margin Loans and Stock Market Bubbles?

Listed author(s):
  • Markus Ricke

    (University of Muenster)

Registered author(s):

    As a reaction to the general suspicion that margin loans had been a key element of the stock market boom and crash of the late 1920s, the Federal Reserve Bank was empowered to regulate margin lending with the Securities and Exchange Act. The efficacy of the Federal Reserve's margin policy has extensively been studied empirically. However, there still exists no formal rationale for the regulation of margin lending. In this paper, we demonstrate in a principal-agent model that the availability of margin loans can cause the development of a stock market bubble through inducing investors to pay more for a stock than its fundamental value. We show that the emergence of a margin loan induced bubble can be ruled out by an initial margin requirement and thus provide a formal rationale for margin regulation.

    If 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.

    File URL:
    Download Restriction: no

    Paper provided by EconWPA in its series Finance with number 0311014.

    in new window

    Length: 50 pages
    Date of creation: 28 Nov 2003
    Date of revision: 17 Dec 2004
    Handle: RePEc:wpa:wuwpfi:0311014
    Note: Type of Document - pdf; prepared on WinXP; pages: 50; figures: 3
    Contact details of provider: Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0311014. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.