Abstract
This article investigates the relationship between initial margin requirements and stock return volatility. Volatility is measured using a GARCH in Mean model. We find no evidence of an empirical relationship between margin requirements and the volatility of the S&P 500 index portfolio's excess returns. Evidence from short-sale data, and model sensitivity analysis are presented which support the hypothesis of no margin-volatility relationship. The results are consistent with the intertemporal CAPM model of Merton (1973) with an aggregate relative risk aversion measure of 4.1. In addition, we find evidence of long-term memory in conditional return distributions' volatility.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Berndt, E., Hall, B., Hall, R. and Hausman, J. “Estimation Inference in Nonlinear Structural Models.” Annals of Economic and Social Measurement 4 (1974).
Blattberg, R. and Gonedes, N. “A Comparison of Stable and Student Distributions as Statistical Models for Stock Prices.” Journal of Business 47 (1974).
Bollerslev, T. P. “Generalized Autoregressive Conditional Heteroscedasticity.” Journal of Econometrics (1986).
Bollerslev, T. P. “Integrated Arch and Cointegration in Variance.” Northwestern University Department of Financing Working Paper, September 1988.
Bollerslev, T. P., Engle, R. and Wooldridge, J. “A Capital Asset Pricing Model with Time Varying Covariances.” Journal of Political Economy (1988).
Brewer, K. R. “Some Consequences of Temporal Aggregation and Systematic Sampling for ARIMA and ARMAX Models.” Journal of Econometrics 1 (1973).
Chou, R. Y. “Volatility Persistence and Stock Valuations: Some Empirical Evidence Using GARCH.” UCSD mimeo, December 1987.
Christie, A. “The Stochastic Behavior of Common Stock Variances: Value Leverage and Interest Rate Effects.” Journal of Financial Economics (December 1982).
DeLong, B., Shleifer, A., Summers, L. and Waldman, R. “The Economic Consequences of Noise Traders.” NBER Working Paper 2395, October 1987.
DieboldF. X. Empirical Modeling of Exchange Rate Dynamics. New York: Springer-Verlag, 1988.
Eckardt, W. and Rogoff, D. “100% Margins Revisited.” The Journal of Finance (June 1976).
EngleR., and BollerslevT. “Modeling the Persistence of Conditional Variances.” Econometric Reviews 5(1 1986), 1–50.
Engle, R., Lilien, D. and Robins, R. “Estimating Time Varying Risk Premia in the Term Structure: The ARCH-M Model.” Econometrica (1987).
Fama, E. “The Behavior of Stock Market Prices.” Journal of Business 38 (1965).
Ferris, S. and Chance, D. “Margin Requirements and Stock Market Volatility.” Economic Letters 28 (1988).
Goldberg, M.A. “The Relevance of Margin Regulations.” Journal of Money, Credit, and Banking 17 (4, November 1985).
Hardouvelis, Gikas. “Margin Requirements and Stock Market Volatility.” FRBNY Quarterly Review (Summer 1988a).
Hardouvelis, Gikas. “Margin Requirements, Volatility, and the Transitority Component of Stock Prices.” First Boston Working Paper Series, FB 88-38, November 1988b.
Hartzmark, M. “The Effects of Changing Margin Levels on Futures Markets Activity, the Composition of Traders in the Market, and Price Performance.” Journal of Business 59 (1986).
Hong, C.H. “The IGARCH Model: The Process, Estimation and Some Monte Carlo Experiments.” UCSD discussion paper 87-32, 1987.
Largay, J. “100% Margins: Combating Speculation in Individual Security Issues.” Journal of Finance (September 1973).
Largay, J. and West, R. “Margin Changes and Stock Price Behavior.” Journal of Political Economy 81 (March 1973).
Merton, R., “An Intertemporal Capital Asset Pricing Model.” Econometrica (1973).
Merton, R., “On Estimating the Expected Return on the Market.” Journal of Financial Economics (1980).
Miller, M. “Debt and Taxes.” Journal of Finance 32 (May 1977).
Moore, T. “Stock Market Margin Requirements.” The Journal of Political Economy 74 (April 1966).
Nelson, D. “Stationarity and Persistence in the GARCH (1,1) Model.” University of Chicago GSB Working Paper, 1988.
Newey, W. and West, K. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica 55 (May 1987).
Officer, R. “The Variability of the Market Factor of the New York Stock Exchange.” Journal of Business 46 (1973).
Pindyck, Robert. “Risk Aversion and Determinants of Stock Market Behavior.” The Review of Economics and Statistics (May 1988).
Schwert, G. W. “Why Does Stock Market Volatility Change Over Time?” University of Rochester Working Paper, May 1988.
Tiao, G. C. “Asymptotic Behavior of Temporal Aggregates of Time Series.” Biometrica 59 (1972).
Warshawsky, M. “The Adequacy and Consistency of Margin Requirements: The Cash Futures, and Options Segments of the Equity Markets.” Mimeo, Capital Markets Section, Board of Governors of the Federal Reserve System, 1989.
Weiss, A. “ARMA Models with ARCH Errors.” Journal of Time Series Analysis (1984).
Working Group on Financial Markets. Interim Report of the Working Group on Financial Markets. Washington, D.C.: U.S. Government Printing Office, May 1988.
Working, H. “A Note on the Correlation of First Differences of Averages in a Random Chain.” Econometrica 28 (1960).
Author information
Authors and Affiliations
Additional information
The analysis and conclusions of this article are those of the author and do not indicate concurrence by other members of the research staff, by the Board of Governors, or by the Federal Reserve Banks.
Rights and permissions
About this article
Cite this article
Kupiec, P.H. Initial margin requirements and stock returns volatility: Another look. J Finan Serv Res 3, 287–301 (1989). https://doi.org/10.1007/BF00122807
Issue Date:
DOI: https://doi.org/10.1007/BF00122807