The Asymmetric Relation between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets

Download or read book The Asymmetric Relation between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets written by Gikas A. Hardouvelis and published by . This book was released on 2001 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 also 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 bear 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.