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Revisiting the empirical estimation of the effect of margin changes on futures trading volume

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  • Hans R. Dutt
  • Ira L. Wein

Abstract

This study revisits the empirical estimation of the effect of margin requirements on trading volume. Although theory suggests that margin requirements impose a cost to traders and will therefore likely reduce volume traded, empirical examinations have generally failed to find this association. The contention of this article is that the theory is correct, but empirical estimation has generally neglected to adjust margins for underlying price risk. After adjusting for risk, this analysis finds economically and statistically significant negative effects of margin requirements on trading volume as predicted by theory. This study examined 6 contracts over a 17‐year time period and found that financial futures contracts (gold, Dow Jones, and 10‐Year Treasury Notes) were considerably more sensitive to changes in margin requirements than agricultural futures (wheat, corn, and oats). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:561–576, 2003

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  • Hans R. Dutt & Ira L. Wein, 2003. "Revisiting the empirical estimation of the effect of margin changes on futures trading volume," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(6), pages 561-576, June.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:6:p:561-576
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    Cited by:

    1. Rafi Eldor & Shmuel Hauser & Uzi Yaari, 2011. "Safer Margins for Option Trading: How Accuracy Promotes Efficiency," Multinational Finance Journal, Multinational Finance Journal, vol. 15(3-4), pages 217-234, September.
    2. Kate Phylaktis & Antonis Aristidou, 2013. "Margin Changes and Futures Trading Activity: a New Approach," European Financial Management, European Financial Management Association, vol. 19(1), pages 45-71, January.
    3. Edward Curran & Jack Hunt & Vito Mollica, 2020. "Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1793-1806, November.

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