Margin Regulation and Stock Market Volatility

Authors

  • DAVID A. HSIEH,

  • MERTON H. MILLER

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    • Fuqua School of Business, Duke University; Graduate School of Business, University of Chicago. The authors thank John Cochrane, Wayne Ferson, Ed George, Milton Harris, John Huizinga, Laurentius Marais, Richard Roll, Peter Rossi, Michael Salinger, William Schwert, Andrei Schleifer, and Lester Telser for helpful discussion.


ABSTRACT

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.

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