Animal Spirits, Margin Requirements, and Stock Price Volatility




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    • Division of Research and Statistics, Federal Reserve Board. The analysis and conclusions herein are solely those of the authors and do not indicate concurrence by the Board of Governors or any other member of the Federal Reserve System. We are indebted to Peter Zemsky for his research assistance and to Greg Duffee, Anil Kashyap, Richard Rosen, and an anonymous referee for helpful comments and suggestions on earlier versions of this paper.


A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy-wide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs.