Margin Debt and Portfolio Margin Requirements

Abstract

This paper investigates the eects of a change in the margin rules of the U.S. stock market. These rules determine how much investors can borrow to leverage their investments. Since the 1929 stock market crash, margin loans have been tightly regulated by the Securities and Exchange Act Regulation T. Between 2005 and 2008, the Securities and Exchange Commission modied these margin rules because they were perceived as not adequately reecting investment risk. The amended rules have made it more attractive for investors to borrow by opening new margin accounts and diversifying their investment positions. This paper tests the hypothesis that the change in the margin rules has accelerated growth in margin debt across the U.S. stock market. It provides statistical evidence that the beginning of this acceleration can be dated to the change in the rules. Since the 2008 nancial crisis, margin debt has grown rapidly, reaching previously unseen levels. This worrying trend has been intensied by record low interest rates and rising stock values. These facts present new incentives for reassessing the ecacy of margin rules and margin requirements.