Abstract
Since 1934 the Federal Reserve Board has had the power to set separate limits on the amount of credit that can be extended to purchasers of common stock. There has been much recent debate about the efficacy of these margin regulations. This article argues that the Fed has responded to increases in stock prices by raising margin requirements. The increase in prices has been associated with a decrease in volatility. There is no evidence that changes in margin requirements reduce subsequent stock return volatility. Also, trading halts have not had much effect on volatility in the past. Trading halts that were associated with banking panics were associated with high stock return volatility, but halts without bank panics were not associated with high levels of volatility.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Black, Fischer. “Studies of Stock Price Volatility Changes.” Proceeding of the 1976 Meetings of the Business and Economics Statistics Section, American Statistical Association, 1976, pp. 177–181.
DavidianMarie and CarrollRaymond J. “Variance Function Estimation.” Journal of the American Statistical Association 82 (1987), 1079–1091.
FamaEugene F., FisherLawrence, JensenMichael C. and RollRichard. “The Adjustment of Stock Prices to New Information.” International Economic Review 10 (1969), 1–21.
Federal Reserve Board. Banking and Monetary Statistics, 1914–1941. Washington, D.C.: U.S. Government Printing Office, 1976a.
. Banking and Monetary Statistics, 1941–1970. Washington, D.C.: U.S. Government Printing Office, 1976b.
FerrisS. and ChanceD. “Margin Requirements and Stock Market Volatility.” Economics Letters 28 (1988), 251–254.
FrenchKenneth R., SchwertG. William and StambaughRobert F. “Expected Stock Returns and Volatility.” Journal of Financial Economics 19 (1987), 3–29.
GrangerC.W.J. “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods.” Econometrica 37 (1969), 424–438.
GrangerC.W.J. and NewboldPaul. “Spurious Regressions in Econometrics.” Journal of Econometrics 2 (1974), 111–120.
Hardouvelis, Gikas A. “Margin Requirements and Stock Market Volatility.” Federal Reserve Bank of New York Quarterly (Summer 1988a).
Hardouvelis, Gikas A. “Margin Requirements, Volatility, and the Transitory Component of Stock Prices.” American Economic Review, forthcoming 1989.
Hsieh, David A. and Miller, Merton H. “Margin Regulation and Stock Market Variability.” Journal of Finance, forthcoming 1989.
Kupiec, Paul H. “Initial Margin Requirements and Stock Returns Volatility: Another Look.” Federal Reserve Board, Finance and Economics Discussion Series #53.
LargayJ. A. and WestRichard R. “Margin Changes and Stock Price Behavior.” Journal of Political Economy 81 (1973), 328–339.
MertonRobert C. “On Estimating the Expected Return on the Market: An Exploratory Investigation.” Journal of Financial Economics 8 (1980), 323–361.
MironJeffrey A. “Financial Panics, the Seasonality of the Nominal Interest Rate, and the Founding of the Fed.” American Economic Review 76 (1986), 125–140.
MooreThomas G. “Stock Market Margin Requirements.” Journal of Political Economy 74 (1966), 158–167.
Nelson, Daniel B. “Conditional Heteroskedasticity in Asset Returns: A New Approach.” Unpublished manuscript, University of Chicago, 1988.
OfficerRobert R. “The Variability of the Market Factor of New York Stock Exchange.” Journal of Business 46 (1973), 434–453.
Pagan, Adrian R. and Schwert, G. William “Alternative Models for Conditional Stock Volatility.” Journal of Econometrics, forthcoming 1989.
PlosserCharles I. and SchwertG. William. “Money, Income and Sunspots: Measuring Economic Relationships and the Effects of Differencing.” Journal of Monetary Economics 4 (1978), 637–660.
PlosserCharles I., SchwertG. William and WhiteHalbert. “Differencing as a Test of Specification.” International Economic Review 23 (1982), 535–552.
Presidential Task Force on Market Mechanisms. Report of the Presidential Task Force on Market Mechanisms. Washington, D.C.: U.S. Government Printing Office, 1988.
Roll, Richard. “Price Volatility, International Market Links, and Their Implications for Regulatory Policies,” Journal of Financial Services Research, this issue.
Salinger, Michael A. “Stock Market Margin Requirements and Volatility: Implications for Regulation of Stock Index Futures.” Journal of Financial Services Research, this issue.
SchwertG. William. “Tests of Causality: The Message in the Innovations.” Carnegie-Rochester Conference Series on Public Policy 10 (1979), 55–96.
. “Effects of Model Specification on Tests for Unit Roots in Macroeconomic Data.” Journal of Monetary Economics 20 (1987), 73–103.
. “Tests for Unit Roots: A Monte Carlo Investigation.” Journal of Business and Economic Statistics 7 (1989a), 147–159.
Schwert, G. William. “Business Cycles, Financial Crises and Stock Volatility.” Carnegie-Rochester Conference Series on Public Policy, forthcoming 1989b.
Schwert, G. William. “Stock Volatility and the Crash of ′87.” Review of Financial Studies, forthcoming.
Schwert, G. William. “Why Does Stock Market Volatility Change Over Time?” Journal of Finance, forthcoming 1989d.
SobelRobert. Panic on Wall Street, rev. ed. New York: E. P. Dutton, 1988.
Turner, Christopher M., Startz, Richard and Nelson, Charles R. “A Markov Model of Heteroskedasticity, Risk and Learning in the Stock Market.” Journal of Financial Economics, forthcoming.
WhiteHalbert. “A Heteroskedasticity-consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica 48 (1980), 817–838.
Author information
Authors and Affiliations
Additional information
This article summarizes discussion that was presented at the Columbia Center for the Study of Futures Markets Conference on Regulatory Reform of Stock and Futures Markets, May 12, 1989.
Rights and permissions
About this article
Cite this article
Schwert, G.W. Margin requirements and stock volatility. J Finan Serv Res 3, 153–164 (1989). https://doi.org/10.1007/BF00122799
Issue Date:
DOI: https://doi.org/10.1007/BF00122799