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Initial Margin Requirements and Market Efficiency

Published online by Cambridge University Press:  31 August 2023

Ferhat Akbas ,
Lezgin Ay  and
Paul D. Koch Open the ORCID record for Paul D. Koch [Opens in a new window]
Ferhat Akbas
Affiliation:
University of Illinois–Chicago College of Business Administration [email protected]
Lezgin Ay
Affiliation:
University of North Texas G. Brint Ryan College of Business [email protected]
Paul D. Koch*
Affiliation:
Iowa State University Ivy College of Business
*
[email protected] (corresponding author)
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Abstract

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We examine the association between margin requirements and the market’s efficiency in incorporating firm-specific and market-level public news. Combining the Fed’s 22 changes in margin requirements with a hand-collected sample of earnings announcements between 1934 and 1975, we show that higher margin requirements induce greater delay in incorporating earnings information into prices. We draw similar conclusions when we analyze the Hou and Moskowitz (2005) price delay measure, as well as indirect measures of leverage constraints over recent years. Further tests suggest that, despite the Fed’s expressed intent to curtail excess speculation, higher margin requirements restrict trading by arbitrageurs more than noise traders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 249 - 282
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School Of Business, University of Washington

Footnotes

We thank Alexander Barinov, Gib Bassett, Andriy Bodnaruk, Oleg Bondarenko, Ginka Borisova, James Brown, Brad Cannon, Hsiu-Lang Chen, Robert Chirinko, Jennifer Conrad (the editor), Arnold Cowan, Yuliya Demyanyk, Egemen Genc, Tyler Jensen, Chao Jiang, Ted Juhl, Petri Jylhä (the referee), Jenny Kim, Mike Kirschenheiter, Tingting Liu, Stanislava Nikolova, Andrew Stephan, Xiaolu Wang, Jide Wintoki, and seminar participants at Iowa State University, the University of Illinois–Chicago, the 2020 Southern Finance Association Conference, the 2021 Eastern Finance Association Conference, and the 2021 American Accounting Association. We gratefully acknowledge the data support of Rajendra Srivastava (SeekEdgar LLC), regarding the daily earnings reports from the Wall Street Journal archives. We also thank Zhongjin Lu and Zhongling Qin for sharing data on the shadow cost of leverage.

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