Margin regulation and volatility |
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| Institution: | 1. University of Zurich, Department of Banking and Finance, Switzerland;2. European Central Bank, Germany;3. Swiss Finance Insitute, Switzerland;4. University of Zurich, Department of Business Administration, Switzerland;1. Money Market, Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland;2. Financial Stability – Oversight, Swiss National Bank, Bundesplatz 1, 3003 Bern, Switzerland;1. School of Economics, Fudan University, China;2. School of Economics and Key Laboratory of Mathematical Economics, Shanghai University of Finance and Economics, China;1. Division of Monetary Affairs Board of Governors of the Federal Reserve System, United States;2. The Clearing House, 1114 Avenue of the Americas, New York, NY 10036, United States;3. La Caixa Research Department, Spain;1. PUC-Rio, Brazil;2. Federal Reserve Bank of Richmond, United States |
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| Abstract: | An infinite-horizon asset-pricing model with heterogeneous agents and collateral constraints can explain why adjustments in stock market margins under US Regulation T had an economically insignificant impact on market volatility. In the model, raising the margin requirement for one asset class may barely affect its volatility if investors have access to another, unregulated class of collateralizable assets. Through spillovers, however, the volatility of the other asset class may substantially decrease. A very strong dampening effect on all assets? return volatilities can be achieved by a countercyclical regulation of all markets. |
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| Keywords: | Collateral constraints General equilibrium Heterogeneous agents Margin requirements Regulation T |
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