Effect Of Margin Requirements Research Articles

The Effects of Margin Requirements in DeFi Lending Markets

The Effects of Margin Requirements in DeFi Lending Markets

Revisiting the empirical estimation of the effect of margin changes on futures trading volume

AbstractThis study revisits the empirical estimation of the effect of margin requirements on trading volume. Although theory suggests that margin requirements impose a cost to traders and will therefore likely reduce volume traded, empirical examinations have generally failed to find this association. The contention of this article is that the theory is correct, but empirical estimation has generally neglected to adjust margins for underlying price risk. After adjusting for risk, this analysis finds economically and statistically significant negative effects of margin requirements on trading volume as predicted by theory. This study examined 6 contracts over a 17‐year time period and found that financial futures contracts (gold, Dow Jones, and 10‐Year Treasury Notes) were considerably more sensitive to changes in margin requirements than agricultural futures (wheat, corn, and oats). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:561–576, 2003

The Relevance of Margin Regulations: Note

Margin credit was singled out for selective credit control in 1934 by the Securities Exchange Act (SEA). This act directed the Federal Reserve Board to regulate security credit so as to the excessive use of credit in the purchase or carrying of securities. The principal objectives of the SEA were: (1) to protect investors from speculative losses, (2) to prevent the speculative securities markets from absorbing credit away from productive commercial and agricultural uses, and (3) to inhibit security price fluctuations due to credit-financed security purchases. ' To date, there has been little research into the effectiveness of margin regulations in attaining the objectives of the SEA.2 One noteworthy exception is a paper by Luckett (1982) which analyzes the efficacy of margin requirements in influencing the investor's degree of personal leverage and risk exposure. However, Luckett's analysis leaves unanswered the impacts of changes in margin requirements on firm valuation, security returns uncertainty, and the allocation of credit in the economy. In this paper modern finance theory is employed to analyze some of these effects. We conclude that corporations will take actions so as to offset, at least in part, the impacts of changes in margin restrictions on personal leverage, and that the effects of margin requirements are generally inconsistent with the objectives of the SEA reformers.