DP1746 The Asymmetric Relation Between Margin Requirements and Stock Market Volatility Across Bull and Bear Markets

Author(s):	Gikas A Hardouvelis, Andreas Pericli, Panayiotis Theodossiou
Publication Date:	November 1997
Keyword(s):	asymmetry, Credit, EGARCH model, Federal Reserve, Margin Requirements, Stock Prices, Volatility
JEL(s):	G18
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1746

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.