IDEAS home Printed from https://ideas.repec.org/a/fip/fedbne/y2001p3-25n4.html
   My bibliography  Save this article

Margin lending and stock market volatility

Author

Listed:
  • Peter Fortune

Abstract

Margin loans have long been associated in the popular mind with instability in security markets, and the potential for margin lending to exacerbate the amplitude of cycles in stock prices has received considerable attention in the years since the Crash of 1929. Despite the many empirical studies of the association between margin loans or margin requirements and the volatility of stock returns, there has been no definitive answer, and the consensus among financial economists is that margin lending plays little, if any, role in shaping the probability distribution of returns on common stocks. Perhaps as a result of this, the Federal Reserve System's margin requirements have not been changed since 1974. ; This study addresses the role of margin requirements from the vantage points of economic theory and the historical record. The author reviews many of the key empirical studies of the link between margin requirements and stock prices. Economic theory suggests many reasons that the link might be weak, and this is supported by many of the empirical studies. ; The author estimates a model of the returns on common stocks in the period 1975-2001. The model includes information on the amount of margin debt outstanding. He concludes that margin loans are a statistically significant factor in the determination of stock returns, and that the effect is stronger and more reliable for the NASDAQ Composite index than for the S&P 500 index. However, the economic significance of margin debt is so low that this study is not able to support a return to the active margin policy that existed prior to 1974.

Suggested Citation

  • Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    • Handle: RePEc:fip:fedbne:y:2001:p:3-25:n:4
    as

    Download full text from publisher

    File URL: http://www.bostonfed.org/economic/neer/neer2001/neer401a.htm
    Download Restriction: no
    File URL: http://www.bostonfed.org/economic/neer/neer2001/neer401a.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Gikas A. Hardouvelis, 1988. "Margin requirements and stock market volatility," Quarterly Review, Federal Reserve Bank of New York, vol. 13(Sum), pages 80-89.
    3. R. Corwin Grube & O. Maurice Joy, 1988. "Some Evidence On The Efficacy Of Security Credit Regulation In The Otc Equity Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(2), pages 137-142, June.
    4. Goldberg, Michael A, 1985. "The Relevance of Margin Regulations: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 521-527, November.
    5. Paul Kofman & James T. Moser, 2001. "Stock margins and the condition probability of price reversals," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q III), pages 2-12.
    6. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
    7. Luckett, Dudley G, 1982. "On the Effectiveness of the Federal Reserve's Margin Requirement," Journal of Finance, American Finance Association, vol. 37(3), pages 783-795, June.
    8. Kupiec, Paul H & Sharpe, Steven A, 1991. "Animal Spirits, Margin Requirements, and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 46(2), pages 717-731, June.
    9. 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 659-674, June.
    10. Paul H. Kupiec, 1989. "Initial margin requirements and stock returns volatility: another look," Finance and Economics Discussion Series 53, Board of Governors of the Federal Reserve System (U.S.).
    11. Largay, James A, III, 1973. "100" Margins: Combating Speculation in Individual Security Issues," Journal of Finance, American Finance Association, vol. 28(4), pages 973-986, September.
    12. Gikas A. Hardouvelis & Stavros Peristiani, 1989. "Do margin requirements matter? Evidence from U.S. and Japanese stock markets," Quarterly Review, Federal Reserve Bank of New York, vol. 14(Win), pages 16-35.
    13. Seguin, Paul J., 1990. "Stock volatility and margin trading," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 101-121, August.
    14. 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.
    15. Largay, James A, III & West, Richard R, 1973. "Margin Changes and Stock Price Behavior," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 328-339, Part I, M.
    16. Gikas A. Hardouvelis & Panayiotis Theodossiou, 2002. "The Asymmetric Relation Between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets," The Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1525-1560.
    17. Salinger, M.A., 1989. "Stock Market Margin Requirements And Volatility: Implications For Regulation Of Stock Index Futures," Papers t4, Columbia - Center for Futures Markets.
    18. Eckardt, Walter L, Jr & Rogoff, Donald L, 1976. "100" Margins Revisited," Journal of Finance, American Finance Association, vol. 31(3), pages 995-1000, June.
    19. Peter Fortune, 1999. "Are stock returns different over weekends? a jump diffusion analysis of the \"weekend effect\"," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-19.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ilhyock Shim & Goetz Von Peter, 2007. "Distress Selling and Asset Market Feedback," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 16(5), pages 243-291, December.
    2. Alex Garivaltis, 2019. "The Laws of Motion of the Broker Call Rate in the United States," IJFS, MDPI, vol. 7(4), pages 1-23, October.
    3. Wu, Wei-Hwa, 2021. "Extendible stock loan," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Bernard McSherry & Berry K. Wilson, 2020. "Margin practices and requirements during the National Banking Era: An early example of macro‐prudential regulation," Review of Financial Economics, John Wiley & Sons, vol. 38(S1), pages 210-225, March.
    5. Guanghui Huang & Weiqing Gu & Wenting Xing & Hongyu Li, 2012. "Active margin system for margin loans using cash and stock as collateral and its application in Chinese market," Papers 1202.5180, arXiv.org.
    6. Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    7. Guanghui Huang & Wenting Xin & Weiqing Gu, 2012. "Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral," Papers 1202.4913, arXiv.org, revised Feb 2012.
    8. John H. Huston & Roger W. Spencer, 2009. "Speculative excess and the Federal Reserve's response," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 26(1), pages 46-61, March.
    9. Zhang, Ting & Li, Honggang, 2013. "Buying on margin, selling short in an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4075-4082.
    10. Sheng Guo, 2014. "Margin requirements and portfolio optimization: A geometric approach," Journal of Asset Management, Palgrave Macmillan, vol. 15(3), pages 191-204, June.
    11. Guo, Ruqiang & Liu, Linjie & Liu, Yuyuan & Zhang, Liang, 2024. "Evolution of trust in the N-player trust game with the margin system," Applied Mathematics and Computation, Elsevier, vol. 473(C).
    12. Joyce Hsieh & Chien-Chung Nieh, 2010. "An overview of Asian equity markets," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 24(2), pages 19-51, November.
    13. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2012. "Margin Requirements and Asset Prices," 2012 Meeting Papers 533, Society for Economic Dynamics.
    14. Hanousek, Jan & Novotný, Jan, 2012. "Price jumps in Visegrad-country stock markets: An empirical analysis," Emerging Markets Review, Elsevier, vol. 13(2), pages 184-201.
    15. 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.
    16. Lebeau, Lucie, 2020. "Credit frictions and participation in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 189(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sheng Guo, 2014. "Margin requirements and portfolio optimization: A geometric approach," Journal of Asset Management, Palgrave Macmillan, vol. 15(3), pages 191-204, June.
    2. Paul Kupiec, 1998. "Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(3), pages 231-255, June.
    3. 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.
    4. Zhang, Ting & Li, Honggang, 2013. "Buying on margin, selling short in an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4075-4082.
    5. 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.
    6. Sang Bin Lee & Tae Yol Yoo, 1991. "Margin Regulation And Stock Market Response: Further Evidence From The U.S. And Some Pacific‐Basin Countries," Review of Financial Economics, John Wiley & Sons, vol. 1(1), pages 79-98, September.
    7. 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.
    8. Joyce Hsieh & Chien-Chung Nieh, 2010. "An overview of Asian equity markets," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 24(2), pages 19-51, November.
    9. Duchêne, Sébastien & Guerci, Eric & Hanaki, Nobuyuki & Noussair, Charles N., 2019. "The effect of short selling and borrowing on market prices and traders’ behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    10. Wen-Chung Guo & Frank Wang & Ho-Mou Wu, 2011. "Financial leverage and market volatility with diverse beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 337-364, June.
    11. Abdur Chowdhury, 1997. "Margin requirements and stock market volatility in Thailand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(2), pages 83-87.
    12. Alexander, Carol & Kaeck, Andreas & Sumawong, Anannit, 2019. "A parsimonious parametric model for generating margin requirements for futures," European Journal of Operational Research, Elsevier, vol. 273(1), pages 31-43.
    13. Xuan Zhou & Honggang Li, 2019. "Buying on Margin and Short Selling in an Artificial Double Auction Market," Computational Economics, Springer;Society for Computational Economics, vol. 54(4), pages 1473-1489, December.
    14. Matsypura, Dmytro & Pauwels, Laurent L., 2016. "Does portfolio margining make borrowing more attractive?," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 128-134.
    15. Hui Ying Sng & Yang Zhang & Huanhuan Zheng, 2020. "Margin trade, short sales and financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(3), pages 673-702, July.
    16. Christian Weller, 2002. "Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(1), pages 1-15, March.
    17. 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.
    18. Chen, Chao & Jeng, Jau-Lian, 1996. "The impact of price limits on foreign currency futures' price volatility and market efficiency," Global Finance Journal, Elsevier, vol. 7(1), pages 13-25.
    19. 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.
    20. James T. Moser, 1992. "Determining margin for futures contracts: the role of private interests and the relevance of excess volatility," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 16(Mar), pages 2-18.

    More about this item

    Keywords

    Stock market; Securities;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:2001:p:3-25:n:4. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Spozio (email available below). General contact details of provider: https://edirc.repec.org/data/frbbous.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.