Margin Requirements and the Security Market Line

52 Pages Posted: 19 Nov 2013 Last revised: 21 Jun 2017

Date Written: June 12, 2017


Between the years 1934 and 1974, the Federal Reserve changed the initial margin requirement for the U.S. stock market 22 times. I use this variation to show that investors leverage constraints affect the pricing of risk. Consistent with the theoretical predictions of Frazzini and Pedersen (2014), I find that tighter leverage constraints result in a flatter relation between betas and expected returns. My results provide strong empirical support for the idea that constraints faced by investors may, at least partially, help explain the empirical failure of the capital asset pricing model.

Keywords: Leverage constraints, security market line, margin regulation

JEL Classification: G12, G14, N22

Suggested Citation

Jylha, Petri, Margin Requirements and the Security Market Line (June 12, 2017). Journal of Finance, Forthcoming, Available at SSRN: or

Petri Jylha (Contact Author)

Aalto University ( email )

P.O. Box 21220
Aalto, 00076

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