Margin Regulation and Volatility

40 Pages Posted: 13 Dec 2013

See all articles by Johannes Brumm

Johannes Brumm

Karlsruhe Institute of Technology

Michael Grill

European Central Bank (ECB)

Felix Kubler

University of Zurich; Swiss Finance Institute

Karl Schmedders

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2013

Abstract

In this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium in finite-horizon economy with heterogeneous agents and collateral constraints. There are two assets in the economy which can be used as collateral for short-term loans. For the first asset the margin requirement is exogenously regulated while the margin requirement for the second asset is determined endogenously. In our calibrated economy, the presence of collateral constraints leads to strong excess volatility. Thus, a regulation of margin requirements may have stabilizing effects. However, in line with the empirical evidence on margin regulation in U.S. stock markets, we show that changes in the regulation of one class of assets may have only small effects on these assets' return volatility if investors have access to another (unregulated) class of collateralizable assets to take up leverage. In contrast, a countercyclical margin regulation of all asset classes in the economy has a very strong dampening effect on asset return volatility.

Keywords: collateral constraints, general equilibrium, heterogeneous agents, margin requirements, Regulation T.

JEL Classification: D53, G01, G12, G18.

Suggested Citation

Brumm, Johannes and Grill, Michael and Kubler, Felix E. and Schmedders, Karl, Margin Regulation and Volatility (December 2, 2013). Swiss Finance Institute Research Paper No. 13-59. Available at SSRN: https://ssrn.com/abstract=2366415 or http://dx.doi.org/10.2139/ssrn.2366415

Johannes Brumm

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Michael Grill

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Karl Schmedders (Contact Author)

University of Zurich ( email )

Moussonstrasse 15
Zürich, CH-8044
Switzerland
+41 (0)44 634 3770 (Phone)

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