Initial Margin Requirements and Market Efficiency

Forthcoming, Journal of Financial and Quantitative Analysis

54 Pages Posted: 26 Mar 2021 Last revised: 26 Dec 2023

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago - College of Business Administration

Lezgin Ay

University of North Texas, Department of Finance

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: August 31, 2023

Abstract

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 1934-1975, 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.

Keywords: market efficiency, leverage constraints, margin requirements, limits to arbitrage, post-earnings announcement drift, PEAD

JEL Classification: G12, G14, G41

Suggested Citation

Akbas, Ferhat and Ay, Lezgin and Koch, Paul D., Initial Margin Requirements and Market Efficiency (August 31, 2023). Forthcoming, Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3792433 or http://dx.doi.org/10.2139/ssrn.3792433

Ferhat Akbas

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Lezgin Ay (Contact Author)

University of North Texas, Department of Finance ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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