An asymmetric process between initial margin requirements and volatility: New evidence from Japanese stock market

Abstract

This paper investigates on whether there is the asymmetric relation between initial margin requirements and volatility across bull and bear markets as well as normal for the Japanese TOPIX and NIKKEI 225 indices over period of 1970 to 1990. We use regression in levels to scrutinize relation between margin requirements and volatility. We find that there is negative relation. This result is confirmed significantly by bootstrap simulation. The findings show that margin requirement affects and causes stock return volatility. Thus higher margin requirements are associated with lower subsequent stock market volatility across normal but bear markets marginally, but show no relationship during bull markets from regression and exponential general autoregressive conditional heteroskedasticity (EGARCH-M) model with GED. As a result, we conclude that there is an asymmetric process that is, depyramiding effect regarding bear markets from Japanese stock market. However, for bull periods, we find that there is no evidence of asymmetric process. In conclusion, we confirm that the policy tool of margin requirements does more effectively work when stock market is in deep recession, but not work in bubble state. Key words: Initial margin requirements, pyramiding or depyramiding effect, volatility, bootstrap simulation, granger causation, exponential general autoregressive conditional heteroskedasticity (EGARCH-M).