On the Effectiveness of the Federal Reserve's Margin Requirement

Luckett, Dudley G.

doi:10.2307/2327708

Cited by 16 publications

(7 citation statements)

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“…Despite the fact that margin regulations have a 75-year history dating from Regulation T in the Securities Act of 1934, the literature on margin calculations is surprisingly small. 14 We can point to only two books (Geelan and Rittereiser, 1998;Curley, 2008) and two papers (Fortune, 2000;Fortune, 2003) devoted to margining practice, two papers (Moore, 1966;Luckett, 1982) studying the influence of margin requirements on investor's equity ratio, and two papers (Rudd and Schroeder, 1982;Fiterman and Timkovsky, 2001) devoted to margining algorithms. The vast majority of publications on margining prior to 2005 consisted primarily of regulatory circulares.…”

Section: Brief History Prior To 2005mentioning

confidence: 99%

MARGINING COMPONENT OF THE STOCK MARKET CRASH OF OCTOBER 2008 - A Lesson of the Struggle with Combinatorial Complexity

Matsypura

Timkovsky

2012

Proceedings of the 1st International Conference on Operations Research and Enterprise Systems

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In July 2005 the US stock market started using the risk-based approach to margining customer accounts gradually excluding from margining practice the strategy-based approach, which has been used for more than four decades. In this paper we argue that this change has a direct link to the stock market crash of October 2008. We also show that among the main reasons of this change are high strategy-based margin requirements in comparison with much lower risk-based, the combinatorial complexity of the strategy-based approach, and the failure of the brokerage industry to adopt the achievements of combinatorial optimization.

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Section: Brief History Prior To 2005mentioning

confidence: 99%

MARGINING COMPONENT OF THE STOCK MARKET CRASH OF OCTOBER 2008 - A Lesson of the Struggle with Combinatorial Complexity

Matsypura

Timkovsky

2012

Proceedings of the 1st International Conference on Operations Research and Enterprise Systems

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“…They concluded that the Federal Reserve does not provide a clear, unambiguous signal to the markets through the imposition and changing of margin requirements. Luckett [18] contended that the power of margin requirements was given to the Federal Reserve to avoid a repeat of the conditions that led to the stock market crash of 1929. He concluded that the use of initial margin requirements by the Federal Reserve has done what it was intended to do.…”

Section: Background and Literature Reviewmentioning

confidence: 99%

The Impact on Stock Returns and Liquidity for OTC Equity Issues Added to the List of Marginable OTC Stocks

Wolfe

Klein

Bowyer

1992

The Financial Review

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This paper studies the impact of being placed on the List of Marginable Over-the-Counter (OTC) Stocks for OTC stocks that were not, at the same time, placed on the National Association of Security Dealers' Automated Quotations National Market System. As such, the study provides relatively unconfounded evidence on the effects brought about by changes in the regulatory status of these stocks. The results indicate that the event of being added to the List of Marginable OTC Stocks provides positive excess returns. The benefit appears to be greater for smaller market value stocks than for larger market value stocks. This result primarily supports a Federal Reserve endorsement effect as larger market value stocks may already have a larger investor following relative to the smaller, relatively unknown issues. This finding supports results from other studies dealing with listing on exchanges-that all stocks do not benefit to the same degree from such an event. Finally, stock liquidity, as measured both by average relative turnover and average relative bid-ask spread, does not appear to be significantly affected based on a comparison of 60-day trading periods before and after the placement of the stocks on the marginability list. Thus, it appears that the Federal Reserve does not induce speculative activity in these stocks.

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“…Because these requirements apply only to loans collateralized by securities holdings, they cannot prevent investors from borrowing their apparent equity in other ways. Luckett (1982) shows that, between January 1966 and December 1979, changes in the level of margin requirements set by the Fed tended to move stockholder equity in margin accounts by only about 15 to 20 percent of the announced change.…”

Section: Futures Exchangesmentioning

confidence: 99%

Regulatory Structure in Futures Markets: Jurisdictional Competition Among the SEC, the CFTC, and Other Agencies

Kane

1984

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This paper studies competition among alternative regulatory bodies for authority over innovative financial contracts. In the United States, this rivalry embraces not only the Commodity Futures Trading Commission and the Securities and Exchange Commission, but state and federal deposit-institution regulators and various private regulatory cooperatives. From a political perspective, multiple regulators develop as a way of formally providing ongoing protection for the interests of diverse political constituencies. But from an economic perspective, competition resulting from overlaps in regulatory responsibility establishes an evolutionary mechanism for adapting regulatory structures to technological and regulation-induced innovation. Using both perspectives, this paper explains how interaction between governmental regulatory agencies and self-regulatory cooperatives produces more-efficient regulatory structures over time. The study also seeks to catalog the particular costs and benefits that may be associated with the regulatory tools used to control futures and securities markets (e.g., broker and trader registration, disclosure requirements, margin requirements, and contract-approval processes) and with changes in the distribution of jurisdiction over these tools. The analysis seeks to clarify the tradeoff between the perceived probability of various problems of market performance (e.g., contract nonperformance, widespread financial instability, and activities such as price manipulation by which corrupt or sophisticated operators separate naive investors from their wealth) and the implicit and explicit cost of reducing this probability.

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On the Effectiveness of the Federal Reserve's Margin Requirement

Cited by 16 publications

References 0 publications

MARGINING COMPONENT OF THE STOCK MARKET CRASH OF OCTOBER 2008 - A Lesson of the Struggle with Combinatorial Complexity

MARGINING COMPONENT OF THE STOCK MARKET CRASH OF OCTOBER 2008 - A Lesson of the Struggle with Combinatorial Complexity

The Impact on Stock Returns and Liquidity for OTC Equity Issues Added to the List of Marginable OTC Stocks

Regulatory Structure in Futures Markets: Jurisdictional Competition Among the SEC, the CFTC, and Other Agencies

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