The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange

54 Pages Posted: 26 Jul 2014

See all articles by Robin K. Chou

Robin K. Chou

National Chengchi University

George H. K. Wang

George Mason University - Department of Finance

Yun-Yi Wang

Feng Chia University

Date Written: July 24, 2014

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.

Keywords: Margins, Trading activity, Trader types, Liquidity, Volatility

JEL Classification: G10

Suggested Citation

Chou, Robin K. and Wang, George H. K. and Wang, Yun-Yi, The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange (July 24, 2014). 27th Australasian Finance and Banking Conference 2014 Paper, Available at SSRN: https://ssrn.com/abstract=2471262 or http://dx.doi.org/10.2139/ssrn.2471262

Robin K. Chou (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091 ext. 81016 (Phone)

George H. K. Wang

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Yun-Yi Wang

Feng Chia University ( email )

100 Wenhwa Road, Taichung, Taiwan, ROC.
Taichung
Taiwan

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