Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions

75 Pages Posted: 9 Aug 2016 Last revised: 5 Feb 2020

See all articles by Prachi Deuskar

Prachi Deuskar

Indian School of Business

Nitin Kumar

Indian School of Business (ISB), Hyderabad

Jeramia Poland

Indian School of Business

Date Written: February 5, 2020

Abstract

Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (a) lower S&P 500 returns, (b) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (c) higher macro, financial, and policy uncertainty, (d) lower interest rates, (e) tighter lending standards by banks, and (f) lower intermediary equity capital. High margin capacity is a precursor, not a response, to borrowing and intermediary constraints and higher volatility. It typically arises when levered investors with profitable past positions limit their leverage. We interpret that it reflects informed investors' conservatism ahead of bad times.

Keywords: Margin debt, economic conditions

JEL Classification: G11, G12, G17

Suggested Citation

Deuskar, Prachi and Kumar, Nitin and Poland, Jeramia, Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions (February 5, 2020). Review of Finance, HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital, Available at SSRN: https://ssrn.com/abstract=2820135 or http://dx.doi.org/10.2139/ssrn.2820135

Prachi Deuskar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Nitin Kumar (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

India

Jeramia Poland

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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