Commentary: Stock Market Margin Requirements and Volatility
Author: Gikas A. Hardouvelis
Journal: Journal of Financial Services Research, Volume 3:139-151 (December 1989)
Abstract: Michael Salinger has provided a very thoughtful and well-balanced article on margin requirements. The article builds upon and extends some of my earlier work on margin requirements and stock market volatility. Professor Salinger, however, reaches a different conclusion than I did about the influence of margin requirements on the stock market. Similarly, Richard Roll’s article in this issue expresses strong doubts about the effectiveness of margin requirements. He surveys some recent work that calls into question the robustness of my results. Thus before I comment on Salinger’s own work, I would like to provide a more general perspective on the issue of margin requirements and answer the basic objections of my critics. I begin in section 1 by describing the main question. Then in section 2, I give an example of the effects of margin requirements on long swings in stock prices, a key variable of interest. In section 3, I respond to the econometric criticisms of Salinger and other critics. In section 4, I comment more generally on Salinger’s article. Finally, in section 5, I summarize my thoughts on the effects of margin requirements and propose possible extensions of current empirical work.