Testing market regulations in experimental asset markets – The case of margin purchases

Sascha Füllbrunn,Tibor Neugebauer

doi:10.1016/j.jebo.2020.09.022

Abstract

Margin requirements regulate the risks of leveraged positions in financial markets. Violated margin requirements trigger margin calls leading to automated liquidation of open margin positions. Due to a lack of active margin regulation, however, empirical studies are not able to capture the effect of margin regulation on asset market performance. Instead, we conduct an experimental finance study to understand how margin regulations, and in particular margin purchases, influence market performance. Our experimental results indicate that permitting margin purchases inflates market prices; in fact, active margin trading positively correlates with market prices. In a robustness check, we also permit short sales which curb though not eliminate the effects from margin purchases.

Highlights

Margin requirements regulate the risks of leveraged positions in financial markets
Our experimental results indicate that permitting margin purchases inflates market prices; active margin trading positively correlates with market prices
The pattern is somewhat different as prices do not start below fundamental value but at or above fundamental value; a reason might be the higher liquidity in comparison to C

Summary

Introduction

Margin requirements regulate the risks of leveraged positions in financial markets. Due to a lack of active margin regulation, empirical studies are not able to capture the effect of margin regulation on asset market performance. We conduct an experimental finance study to understand how margin regulations, and in particular margin purchases, influence market performance. Our experimental results indicate that permitting margin purchases inflates market prices; active margin trading positively correlates with market prices. 1. Introduction: leverage in financial asset markets “I guarantee you that if you want to get rid of the bubble, whatever it is, that [raising margin requirements] will do it. Last but not least we would like to thank the two reviewers and the editor for helpful comments

Results

Discussion

Conclusion