On the Effectiveness of the Federal Reserve's Margin Requirement



    Professor of EconomicsSearch for more papers by this author
    • Professor of Economics, Iowa State University (Ames). The author would like to thank his colleagues, Arnold Faden, Duane Harris, Harvey Lapan, and Dennis Starleaf; Scott Winningham of the Federal Reserve Bank of Kansas City; the editor of this journal; and Dwight M. Jaffee, for many helpful comments. William Colclough, graduate assistant, did the computations.


A portfolio-theoretic model of the optimal margin account is developed. It is argued that the Federal Reserve's goal in setting the margin requirement is to influence investor equity ratios. Using the average equity ratio as the dependent variable and the arguments of the model as independent variables, an empirical model is estimated. It is concluded that the margin requirement is an effective regulatory tool.