| Abstract: | Higher initial margin requirements are associated with lowersubsequent stock market volatility during normal and bull periods,but show no relationship during bear periods. Higher marginsare also negatively related to the conditional mean of stockreturns, apparently because they reduce systemic risk. We concludethat a prudential rule for setting margins (or other regulatoryrestrictions) is to lower them in sharply declining marketsin order to enhance liquidity and avoid a depyramiding effectin stock prices, but subsequently raise them and keep them atthe higher level in order to prevent a future pyramiding effect. |
