IDEAS home Printed from https://ideas.repec.org/a/kap/jfsres/v13y1998i3p231-255.html
   My bibliography  Save this article

Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?

Author

Listed:
  • Paul Kupiec

Abstract

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A relatively comprehensive review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of \"excess\" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jfsres:v:13:y:1998:i:3:p:231-255
    DOI: 10.1023/A:1008080227190
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1023/A:1008080227190
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1023/A:1008080227190?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    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. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May.
    3. Gikas A. Hardouvelis, 1988. "Margin requirements and stock market volatility," Quarterly Review, Federal Reserve Bank of New York, vol. 13(Sum), pages 80-89.
    4. Paul H. Kupiec, 1993. "Futures margins and stock price volatility: Is there any link?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(6), pages 677-691, September.
    5. Thomas Gale Moore, 1966. "Stock Market Margin Requirements," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 158-158.
    6. Figlewski, Stephen, 1981. "Futures Trading and Volatility in the GNMA Market," Journal of Finance, American Finance Association, vol. 36(2), pages 445-456, May.
    7. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
    8. Paul H. Kupiec & A. Patricia White, 1996. "Regulatory competition and the efficiency of alternative derivative product margining systems," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 943-968, December.
    9. George W. Fenn & Paul Kupiec, 1993. "Prudential margin policy in a futures‐style settlement system," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(4), pages 389-408, June.
    10. Ferris, Stephen P. & Chance, Don M., 1988. "Margin requirements and stock market volatility," Economics Letters, Elsevier, vol. 28(3), pages 251-254.
    11. Gorton, Gary B & Pennacchi, George G, 1993. "Security Baskets and Index-Linked Securities," The Journal of Business, University of Chicago Press, vol. 66(1), pages 1-27, January.
    12. Raymond P. H. Fishe & Lawrence G. Goldberg, 1986. "The effects of margins on trading in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(2), pages 261-271, June.
    13. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-1145, December.
    14. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
    15. repec:bla:jfinan:v:44:y:1989:i:2:p:487-98 is not listed on IDEAS
    16. Hartzmark, Michael L, 1986. "The Effects of Changing Margin Levels on Futures Market Activity, the Composition of Traders in the Market, and Price Performance," The Journal of Business, University of Chicago Press, vol. 59(2), pages 147-180, April.
    17. Hardouvelis, Gikas A & Kim, Dongcheol, 1995. "Price Volatility and Futures Margins," CEPR Discussion Papers 1263, C.E.P.R. Discussion Papers.
    18. Jegadeesh, Narasimhan & Subrahmanyam, Avanidhar, 1993. "Liquidity Effects of the Introduction of the S&P 500 Index Futures Contract on the Underlying Stocks," The Journal of Business, University of Chicago Press, vol. 66(2), pages 171-187, April.
    19. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-1237, December.
    20. Roger Craine., 1992. "Are Futures Margins Adequate?," Economics Working Papers 92-192, University of California at Berkeley.
    21. Hardouvelis, G.A., 1989. "Commentary: Stock Market Margin Requirements And Volatility," Papers t5, Columbia - Center for Futures Markets.
    22. 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.
    23. repec:bla:jfinan:v:44:y:1989:i:5:p:1115-53 is not listed on IDEAS
    24. 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.
    25. 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.
    26. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
    27. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    28. Powers, Mark J, 1970. "Does Futures Trading Reduce Price Fluctuations in the Cash Markets?," American Economic Review, American Economic Association, vol. 60(3), pages 460-464, June.
    29. Stephen Figlewski, 1984. "Margins and market integrity: Margin setting for stock index futures and options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 4(3), pages 385-416, September.
    30. 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.).
    31. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    32. Craine, Roger, 1992. "Are Futures Margins Adequate?," Department of Economics, Working Paper Series qt30c296g3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    33. W. Gary Simpson & Timothy C. Ireland, 1982. "The effect of futures trading on the price volatility of gnma securities," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 2(4), pages 357-366, December.
    34. 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.
    35. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1995. "Does options trading lead to greater cash market volatility?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(7), pages 785-803, October.
    36. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
    37. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, vol. 46(3), pages 434-453, July.
    38. Day, Theodore E & Lewis, Craig M, 1997. "Initial Margin Policy and Stochastic Volatility in the Crude Oil Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 303-332.
    39. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 441-468, December.
    40. Seguin, Paul J., 1990. "Stock volatility and margin trading," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 101-121, August.
    41. Kandice H. Kahl & Roger D. Rutz & Jeanne C. Sinquefield, 1985. "The economics of performance margins in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(1), pages 103-112, March.
    42. 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.
    43. 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.
    44. Subrahmanyam, Avanidhar, 1991. "A Theory of Trading in Stock Index Futures," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 17-51.
    45. Salinger, M.A., 1989. "Stock Market Margin Requirements And Volatility: Implications For Regulation Of Stock Index Futures," Papers t4, Columbia - Center for Futures Markets.
    46. Avraham Kamara & Thomas W. Miller Jr. & Andrew F. Siegel, 1992. "The effect of futures trading on the stability of standard and poor 500 returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(6), pages 645-658, December.
    47. L. Kalavathi & Latha Shanker, 1991. "Margin requirements and the demand for futures contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(2), pages 213-237, April.
    48. Stanley R. Pliska & Catherine T. Shalen, 1991. "The effects of regulations on trading activity and return volatility in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(2), pages 135-151, April.
    49. Franklin R. Edwards, 1988. "Futures trading and cash market volatility: Stock index and interest rate futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 8(4), pages 421-439, August.
    50. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June.
    51. Kenneth Froewiss, 1978. "GNMA futures: stabilizing or destabilizing?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 20-29.
    52. Hong Chol & Avanidhar Subrahmanyam, 1994. "Using intraday data to test for effects of index futures on the underlying stock markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 293-322, May.
    53. Weller, Paul & Yano, Makoto, 1987. "Forward Exchange, Futures Trading, and Spot Price Variability: A General Equilibrium Approach," Econometrica, Econometric Society, vol. 55(6), pages 1433-1450, November.
    54. Franklin R. Edwards, 1983. "The clearing association in futures markets: Guarantor and regulator," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 3(4), pages 369-392, December.
    55. Raymond P. H. Fishe & Lawrence G. Goldberg & Thomas F. Gosnell & Sujata Sinha, 1990. "Margin requirements in futures markets: Their relationship to price volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 10(5), pages 541-554, October.
    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. D. Matsypura & V.G. Timkovsky, 2013. "Integer programs for margining option portfolios by option spreads with more than four legs," Computational Management Science, Springer, vol. 10(1), pages 51-76, February.
    2. 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.
    3. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The history of cyclical macroprudential policy in the United States," Finance and Economics Discussion Series 2013-29, Board of Governors of the Federal Reserve System (U.S.).
    4. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2002. "Bubbles in experimental asset markets: Irrational exuberance no more," FRB Atlanta Working Paper 2002-24, Federal Reserve Bank of Atlanta.
    5. Brumm, Johannes & Grill, Michael & Kubler, Felix & Schmedders, Karl, 2015. "Margin regulation and volatility," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 54-68.
    6. Daskalaki, Charoula & Skiadopoulos, George, 2016. "The effects of margin changes on commodity futures markets," Journal of Financial Stability, Elsevier, vol. 22(C), pages 129-152.
    7. Nidhi Aggarwal & Susan Thomas, 2019. "When stock futures dominate price discovery," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 263-278, March.
    8. 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.
    9. Lucy F. Ackert & Narat Charupat & Bryan K. Church & Richard Deaves, 2006. "Margin, Short Selling, and Lotteries in Experimental Asset Markets," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 419-436, October.
    10. Xiong, Wei, 2001. "Convergence trading with wealth effects: an amplification mechanism in financial markets," Journal of Financial Economics, Elsevier, vol. 62(2), pages 247-292, November.
    11. Goldstein, Michael A. & Kavajecz, Kenneth A., 2004. "Trading strategies during circuit breakers and extreme market movements," Journal of Financial Markets, Elsevier, vol. 7(3), pages 301-333, June.
    12. Michael A. Goldstein & Kenneth A. Kavajecz, "undated". "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 1-00, Wharton School Rodney L. White Center for Financial Research.
    13. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2012. "Margin Requirements and Asset Prices," 2012 Meeting Papers 533, Society for Economic Dynamics.
    14. Shinhua Liu, 2008. "Index Futures and Predictability of the Underlying Stocks’ Returns: The Case of the Nikkei 225," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(1), pages 77-91, August.
    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. Raymond Knott & Marco Polenghi, 2006. "Assessing central counterparty margin coverage on futures contracts using GARCH models," Bank of England working papers 287, Bank of England.
    17. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Zhang, Wei David & Seyedian, Mojtaba & Li, Jinliang, 2005. "Margin borrowing, stock returns, and market volatility: Evidence from margin credit balance," Economics Letters, Elsevier, vol. 87(2), pages 273-278, May.

    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. 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.
    3. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    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.
    5. 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.
    6. Shang-Jin Wei & Jungshik Kim, 1997. "The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?," NBER Working Papers 6256, National Bureau of Economic Research, Inc.
    7. 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.
    8. David Bates & Roger Craine, 1998. "Valuing the Futures Market Clearinghouse's Default Exposure During the 1987 Crash," NBER Working Papers 6505, National Bureau of Economic Research, Inc.
    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. 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.
    11. Xiong, Wei, 2001. "Convergence trading with wealth effects: an amplification mechanism in financial markets," Journal of Financial Economics, Elsevier, vol. 62(2), pages 247-292, November.
    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. 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.
    14. Fleming, Jeff & Ostdiek, Barbara, 1999. "The impact of energy derivatives on the crude oil market," Energy Economics, Elsevier, vol. 21(2), pages 135-167, April.
    15. Daskalaki, Charoula & Skiadopoulos, George, 2016. "The effects of margin changes on commodity futures markets," Journal of Financial Stability, Elsevier, vol. 22(C), pages 129-152.
    16. Ito, Takatoshi & Lin, Wen-Ling, 2001. "Race to the center: competition for the Nikkei 225 futures trade," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 219-242, July.
    17. Liu, Shinhua, 2009. "The impacts of index options on the underlying stocks: The case of the S&P 100," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1034-1046, August.
    18. Bohl, Martin T. & Diesteldorf, Jeanne & Siklos, Pierre L., 2015. "The effect of index futures trading on volatility: Three markets for Chinese stocks," China Economic Review, Elsevier, vol. 34(C), pages 207-224.
    19. Dr. Dhanya Alex & Dr. Roshna Varghese, 2015. "Derivative Trading and Spot Market Volatility: Evidence from Indian Market," International Journal of Innovation and Economic Development, Inovatus Services Ltd., vol. 1(3), pages 23-34, August.
    20. Zhang, Yue, 2015. "The securitization of gold and its potential impact on gold stocks," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 309-326.

    More about this item

    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:kap:jfsres:v:13:y:1998:i:3:p:231-255. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.