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The Assymmetric Relation Between Margin Requirements and Stock Market Volatility Across Bull and Bear Markets
Authors: Gikas A. Hardouvelis, P. Theodossiou
Journal: The review of Financial Studies, Winter 2002, 15:5, 1525-1559
Abstract: 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 alto 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 de-pyramiding effect in stock prices, but subsequently raise them and keep them at the higher level in order to prevent a future pyramiding effect.