Working Paper: CEPR ID: DP1746
Authors: Gikas Hardouvelis; Andreas Pericli; Panayiotis Theodossiou
Abstract: EGARCH-M models based on a daily, weekly, and monthly S&P?500 returns over the period October 1934?September 1994 reveal that higher margins have a much stronger negative relation to subsequent volatility in bull markets than in bear markets. Higher margins are also negatively related to subsequent conditional stock returns, apparently because they reduce systemic risk. These empirical regularities are consistent with the pyramiding-depyramiding framework of stock prices that US Congress had in mind when it instituted margin regulation in 1934, and suggest that a prudential rule for setting margins over time would be to raise them during periods of unwarranted price increases and to lower them immediately after large declines in stock prices.
Keywords: margin requirements; stock prices; volatility; EGARCH model; Federal Reserve; credit asymmetry
JEL Codes: G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher initial margin requirements (G19) | Subsequent stock market volatility (G17) |
| Higher margin requirements (G19) | Conditional stock returns (G17) |
| Higher margin requirements (G19) | Systemic risk (E44) |
| Lower margin requirements during price declines (E44) | Volatility (E32) |
| Higher margins (D43) | Subsequent volatility in bull markets vs bear markets (E32) |