Margin Regulation and Volatility

41 Pages Posted: 27 Jul 2014

See all articles by Johannes Brumm

Johannes Brumm

Karlsruhe Institute of Technology

Felix Kubler

University of Zurich; Swiss Finance Institute

Michael Grill

European Central Bank (ECB)

Karl Schmedders

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2014


In this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium infinite-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 Kubler, Felix E. and Grill, Michael and Schmedders, Karl, Margin Regulation and Volatility (July 1, 2014). ECB Working Paper No. 1698. Available at SSRN:

Johannes Brumm (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

Swiss Finance Institute

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

Michael Grill

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Karl Schmedders

University of Zurich ( email )

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

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