Margin Regulation and Stock Volatility
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Financial Services Research, 3 (December 1989) 153-164
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 paper 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.
Key words: Stock returns, Volatility, Margins, Trading halts, Circuit breakers, NYSE, Federal Reserve Board
JEL Classifications: G14, G18, E51
Cited 9 times in the SSCI through April 1996
© Copyright 1989, Kluwer
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