Stock market margin requirements and volatility: Implications for regulation of stock index futures

This article reexamines the evidence on the relationship between stock market margin buying and volatility, and discusses the implications for the regulation of futures markets margin requirements. Post-war data provide no evidence of a link between the initial margin requirements set by the Federal Reserve and stock market volatility. Over the entire period in which the Federal Reserve has set margin requirements (1934-present), there is a correlation between margin requirements and margin debt on the one hand and volatility on the other. However, margin debt is not primarily associated with downside volatility and margin requirements are not primarily associated with upside volatility, as would be expected if margin buying were the cause of the volatility. Thus, the experience with stock market margin requirements provides no support for regulating futures markets margins in order to curb volatility. While this evidence does not rule out the possibility that margin buying contributed to the speculative boom of the 1920s and the 1929 crash, margin debt represented a much greater fraction of the 1929 stock market than have stock market futures in the 1980s. Even taking the experience of the 1920s into account, therefore, there is still no justification for regulating futures margins in order to curb volatility.This article was prepared for the Columbia Center for the Study of Futures Markets Conference on Regulatory and Structural Reform of Stock and Futures Markets.