Should Retail Investors' Leverage Be Limited?

58 Pages Posted: 3 Jan 2018

See all articles by Rawley Heimer

Rawley Heimer

Boston College - Department of Finance

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

Abstract

Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage-constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.

Suggested Citation

Heimer, Rawley and Simsek, Alp, Should Retail Investors' Leverage Be Limited? (December 2017). NBER Working Paper No. w24176. Available at SSRN: https://ssrn.com/abstract=3095136

Rawley Heimer (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
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Chestnut Hill, MA 02467-3808
United States

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive E52-552
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617-2585630 (Phone)

HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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