Margin Requirements, Risk Taking, and Multifactor Models

68 Pages Posted: 11 Dec 2018 Last revised: 3 Dec 2019

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago - College of Business Administration

Lezgin Ay

University of North Texas, Department of Finance

Chao Jiang

University of South Carolina - Department of Finance

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: November 21, 2019

Abstract

When investors anticipate the Fed increasing margin requirements, they bid up the riskier stocks in the long legs of hedge portfolios associated with the market, HML, and SMB factors relative to the less risky stocks in the short legs. Following such a policy change, the returns on these hedge portfolios decline, implying lower subsequent compensation for bearing the risk associated with these three factors. In contrast, margin requirements are unrelated to returns on the momentum factor. Our evidence suggests that investors adjust their risk exposures to the market, SMB, and HML factors when leverage constraints are changed, but not momentum.

Keywords: Asset pricing, CAPM, multifactor models, security market line, leverage constraints, margin requirements, risk premia.

JEL Classification: G12, G14, G41

Suggested Citation

Akbas, Ferhat and Ay, Lezgin and Jiang, Chao and Koch, Paul D., Margin Requirements, Risk Taking, and Multifactor Models (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3286445 or http://dx.doi.org/10.2139/ssrn.3286445

Ferhat Akbas

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Lezgin Ay

University of North Texas, Department of Finance ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Chao Jiang (Contact Author)

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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