Abstract
We examine the effects of margin changes on futures trading activity, the composition of traders and market liquidity, using an account level data set from the Taiwan Futures Exchange. We find that margin increases reduce trading activity for all trader types, which is consistent with the hypothesis that higher margins increase the costs of trading. Institutional traders are more sensitive to changes in margin requirements than individual traders, because their trading activity decreases significantly more than that of individual traders. This in turn leads to increases in market price volatility and decreases in market liquidity. These results imply that margin requirement is not an effective policy tool in limiting the trading activity of noise speculators to reduce market volatility.
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