Initial margin requirements and stock returns volatility: Another look

This article investigates the relationship between initial margin requirements and stock return volatility. Volatility is measured using a GARCH in Mean model. We find no evidence of an empirical relationship between margin requirements and the volatility of the S&P 500 index portfolio's excess returns. Evidence from short-sale data, and model sensitivity analysis are presented which support the hypothesis of no margin-volatility relationship. The results are consistent with the intertemporal CAPM model of Merton (1973) with an aggregate relative risk aversion measure of 4.1. In addition, we find evidence of long-term memory in conditional return distributions' volatility.The analysis and conclusions of this article are those of the author and do not indicate concurrence by other members of the research staff, by the Board of Governors, or by the Federal Reserve Banks.