margin borrowing stock returns and market volatility evidence from margin credit balance abstract we use margin credit balance as a measure of leverage to examine the time series relation among margin borrowing stock returns and market volatility we observe a strong market momentum effect and a significant causal relation between prior stock returns and both leverage and volatility

another day another collar an evaluation of the effects of nyse rule 80a on trading costs and intermarket arbitrage in 1990 the new york stock exchange amended its rule 80a to restrict stock index arbitrage on days of large price movements the authors find that rule 80a significantly curtails or collars index arbitrage activity in spite of this curtailment in index arbitrage volume they find that rule 80a appears to have had little overall impact on trading costs and intermarket linkage although pricing discrepancies between the markets do appear to be eliminated less quickly the authors results are consistent with the hypothesis that information is conveyed from one market to the other by means other than formal arbitrage copyright 1998 by university of chicago press

trading halts and market activity an analysis of volume at the open and the close this paper analyzes how the daily opening and closing of financial markets affect trading volume we model the desire to trade at the beginning and end of the day as a function of overnight return volatility nyse data from 1933 88 indicate that closing volume is positively related to expected overnight volatility while volume at the open is positively related to both expected and unexpected volatility from the previous night we interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed this desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers

stock volatility and margin trading abstract this study examines additions of otc issues to the list of marginable securities and tests the hypothesis that margin trading destabilizes prices and contributes to volatility no detrimental effects are found instead evidence suggests that margin eligibility increases the flow of information and enhances depth though volumes are 30 larger volatility and noise decrease with the inception of margin trading further margin eligibility is valuable increases in value of 2 occur upon the announcement of eligibility analysis of a small sample of margin eligibility revocations provides no evidence that tightening margin restrictions reduces volatility

technical note a price vector model of demand for consumer durables preliminary developments although considerable research has been conducted on optimal pricing policies for manufacturers relatively little work has been done on how price enters the consumer choice process in this paper a model is developed for durables purchasing which integrates both economic and behavioral research by specifying a vector of five price concepts which affect purchasing behavior of particular interest are variables relating to future price expectations due to data limitations a revised model is estimated and the results provide preliminary support for the general model

margin regulation and stock market volatility using daily and monthly stock returns we find no convincing evidence that federal reserve margin requirements have served to dampen stock market volatility the contrary conclusion expressed in recent papers by hardouvelis 1988a b is traced to flaws in his test design we do detect the expected negative relation between margin requirements and the amount of margin credit outstanding we also confirm the recent finding by schwert 1988 that changes in margin requirements by the fed have tended to follow rather than lead changes in market volatility after 55 years stock market margin requirements are again a source of controversy the securities and exchange act of 1934 transferred to the federal reserve system the authority exercised previously by the new york stock exchange and other private sector exchanges to set the minimum margins i e down payments that securities brokers and dealers subsequently expanded to all lenders must require of customers purchasing common stocks on credit the transfer of authority reflected the view widely held at the time that the low initial margins set by the exchanges had fueled the stock market boom of the 1920 s and that the frenzied liquidation of shares in response to margin calls had accelerated the crash in october 1929 supposedly dragging the economy down with it congress hoped that timely raising of margin requirements by the monetary authorities might dampen speculative excesses before they raged out of control or in today s terms that margin controls might reduce market volatility what the federal reserve has done since then with its margin setting authority can be seen from figure 1 which shows the time paths both of margins and one measure of market volatility from october 1934 to december 1987 margin requirements were set initially at 45 percent raised to 55 percent during the boomlet of 1936 and then cut back to a low of 40 percent after the sharp stockmarket break in the autumn of 1937 the requirement stayed at that level for the remainder of the 30 s and most of the war years but was stepped up sharply as the war drew to a close reaching 100 percent i e all cash no borrowing for most of 1946 changes were frequent over the next two and a half decades

trader leverage and liquidity does trader leverage drive equity market liquidity we use the unique features of the margin trading system in india to identify a causal relationship between traders ability to borrow and a stock s market liquidity to quantify the impact of trader leverage we employ a regression discontinuity design that exploits threshold rules that determine a stock s margin trading eligibility we find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders contrarian strategies consistent with downward liquidity spirals due to deleveraging we also find that this effect reverses during crises

stock volatility in the new millennium how wacky is nasdaq abstract the recent volatility of stock prices has caused many people to conclude that investors have become irrational in valuing at least some stocks this paper investigates the behavior of the volatility of stocks on the nasdaq which tend to be smaller companies with more growth options in relation to the more seasoned issues reflected in the standard poor s 500 portfolio it also analyzes the relation of the unusual nasdaq volatility to the hot ipo market in 1998 and 1999 the factor that seems to explain unusual volatility best is technology not firm size or the immaturity of the firm

convergence trading with wealth effects an amplification mechanism in financial markets abstract i study convergence traders with logarithmic utility in a continuous time equilibrium model in general convergence traders reduce asset price volatility and provide liquidity by taking risky positions against noise trading however when an unfavorable shock causes them to suffer capital losses thus eroding their risk bearing capacity they liquidate their positions thereby amplifying the original shock in extreme circumstances this wealth effect causes convergence traders to be destabilizing in that they trade in exactly the same direction as noise traders this situation is consistent with the near collapse of long term capital management in 1998

the firm size relation and stock market responses to post 1962 changes in federal reserve margin levels evidence from an exhaustive sample of exchange listed firms abstract an analysis of the effects of changes in us federal reserve stock market margin requirements on the return characteristics of firms of differing equity values suggests that the price changes observed for smaller firms following margin announcements are of considerably greater magnitude than the reactions observed for the s p composite index

initial margin policy and stochastic volatility in the crude oil futures market this article examines the relationship between the volatility of the crude oil futures market and changes in initial margin requirements to closely match changes in futures market volatility with the corresponding changes in margin requirements we infer the volatility of the futures market from the prices of crude oil futures options contracts using a mean reverting diffusion process for volatility we show that changes in margin policy do not affect subsequent market volatility

the effect of capital gains taxes on the initial pricing and underpricing of ipos we investigate the extent to which capitalization of expected capital gains taxes and the lock in effect induced by the capital gains tax rate differential simultaneously impact the pricing and underpricing of initial public offerings ipos using a large sample of ipos from 1987 to 2010 we estimate regressions of offer prices and first day underpricing on tax rates supporting tax capitalization ipo offer prices decrease in long term capital gains taxes supporting lock in ipo underpricing increases in the long term and short term tax rate differential these effects are consistent with capital gains taxes simultaneously reducing ipo proceeds and exacerbating ipo underpricing

further evidence on the firm size relation and stock market responses to changes in federal reserve margin levels the virtually monotonic firm size price reactions observed following changes in u s federal reserve market margin requirements over the post 1962 period provide dramatic new evidence in support of the hypothesis that changes in margin levels are associated with changes in security return behavior variance tests of the 1970 and 1971 margin decreases also produce evidence consistent with this hypothesis

the effect of short selling and borrowing on market prices and traders behavior this paper studies the influence of allowing borrowing and short selling on market prices and traders forecasts in an experimental asset market we verify although not statistically significantly so that borrowing tends to increase asset overvaluation and price orecasts while short selling tends to reduce these measures we also show that a number of results on beliefs traders types cognitive sophistication and earnings obtained in earlier experimental studies in which borrowing and short selling are not possible generalize to markets with borrowing and short sales

margin requirements and stock market volatility abstract it has long been recognized that margin requirements through leverage affect the volume of speculative activity controlling speculative behavior is one approach to inhibiting overvaluation in stocks and reducing the potential for a precipitate price decline fueled by the involuntary selling that stems for example from margin calls

regulating financial markets protecting us from ourselves and others the current global financial and economic crisis highlights the ongoing tug of war between those who pull toward free markets and those who pull toward strict regulation of markets between those who pull toward libertarianism and those who pull toward paternalism rising stock markets and economic prosperity empower those who favor free markets and libertarianism stock market crashes and economic recessions empower those who favor strict regulation and paternalism this article discusses the current crisis against the backdrop of earlier crises and focuses on margin regulations which limit leverage suitability regulations which require providers of financial products to act in the interests of their clients blue sky laws which prohibit securities deemed unfair or unduly risky and mandatory disclosure regulations which require providers of financial products to disclose pertinent information even if potential buyers do not ask for it

the bootstrap approach for testing skewness persistence this study presents a new methodology for testing changes in skewness between time periods or samples using the bootstrap method a monte carlo simulation experiment was conducted to compare the effectiveness of the bootstrap method with the method suggested by lau wingender and lau 1989 to test skewness persistence the results show the bootstrap method to be more powerful than the other method the bootstrap method was also used to determine the persistence of skewness in stock returns the results show that in a large percentage of stocks skewness persists over time

inflation and growth in an open economy this paper examines the relationship between growth and inflation in an open economy where private agents can transfer resources abroad to obtain endogenous growth we assume that the international credit market is imperfect we show that when the governments behave rationally the growth and inflation rates should not be correlated and that the optimal inflation rate can be found by setting the interest rate elasticity of money holdings equal to the tax rate elasticity of the tax base

animal spirits margin requirements and stock price volatility a simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices investors are assumed to exhibit heterogeneous preferences for risk bearing the distribution of which evolves stochastically across generations this framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility depending upon the microeconomic structure behind fluctuations in economy wide average risk bearing propensity the ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs beyond their prudential functions the effects of initial margin requirements on securities markets are not well understood many have argued based upon empirical findings that the level of margin requirements has no discernable impact on stock price behavior nevertheless the view that high margin requirements dampen speculative excesses and reduce excess price volatility remains popular the simultaneous existence of such views highlights the uncertainty surrounding this issue in fact there exists no rigorously articulated theory of the interaction between initial margin requirements and stock prices and their returns characteristics in this paper we construct a simple dynamic model useful for characterizing the effects of initial margin requirements on security prices and returns to analyze the impact of margins we introduce investor heterogeneity into an otherwise simplified overlapping generations olg economy 2 the olg models are constructed so that each generation displays heterogeneous preferences or beliefs the distribution of which evolves stochastically across generations in each of two heterogeneous taste models we consider there are two types of agents one of which is more risk tolerant than the other in one model the

price formation on stock exchanges the evolution of trading within the day prior analyses of prices of the nyse and other exchanges find that transitory price volatility is greater at the open of trading than at the close we extend this line of research by using 40 years of hourly dow jones 65 composite price index data to estimate transitory volatility throughout the trading day our results indicate that transitory volatility steadily declines during the trading day we find a similar intraday decline in transitory volatility for a 2 1 2 year sample of the individual firms in the dow jones 30 industrials index the results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the asymmetric relation between initial margin requirements and stock market volatility across bull and bear markets higher initial margin requirements are associated with lower subsequent stock market volatility during normal and bull periods but show no relationship during bear periods higher margins are also negatively related to the conditional mean of stock returns apparently because they reduce systemic risk we conclude that a prudential rule for setting margins or other regulatory restrictions is to lower them in sharply declining markets in order to enhance liquidity and avoid a depyramiding effect in stock prices but subsequently raise them and keep them at the higher level in order to prevent a future pyramiding effect copyright 2002 oxford university press

bootstrapping financial time series it is well known that time series of returns are characterized by volatility clustering and excess kurtosis therefore when modelling the dynamic behavior of returns inference and prediction methods based on independent and or gaussian observations may be inadequate as bootstrap methods are not in general based on any particular assumption on the distribution of the data they are well suited for the analysis of returns this paper reviews the application of bootstrap procedures for inference and prediction of financial time series in relation to inference bootstrap techniques have been applied to obtain the sample distribution of statistics for testing for example autoregressive dynamics in the conditional mean and variance unit roots in the mean fractional integration in volatility and the predictive ability of technical trading rules on the other hand bootstrap procedures have been used to estimate the distribution of returns which is of interest for example for value at risk var models or for prediction purposes although the application of bootstrap techniques to the empirical analysis of financial time series is very broad there are few analytical results on the statistical properties of these techniques when applied to heteroscedastic time series furthermore there are quite a few papers where the bootstrap procedures used are not adequate