Initial Margin Requirements and Market Efficiency

86 Pages Posted: 26 Mar 2021 Last revised: 23 Mar 2022

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Lezgin Ay

Iowa State University - Department of Finance, Ph.D. Student

Paul D. Koch

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

Date Written: March 22, 2022

Abstract

We examine the association between margin requirements and the market’s efficiency in incorporating firm-specific and market-level public news. Combining the Fed’s 22 changes in margin requirements with a hand-collected sample of earnings announcements between 1934-1975, we show that higher margin requirements induce greater delay in incorporating earnings information into prices. We draw similar conclusions when we analyze the Hou and Moskowitz (2005) price delay measure, as well as indirect measures of leverage constraints over recent years. Further tests suggest that, despite the Fed’s expressed intent to curtail excess speculation, higher margin requirements restrict trading by arbitrageurs more than noise traders.

Keywords: market efficiency, leverage constraints, margin requirements, limits to arbitrage, post-earnings announcement drift, PEAD

JEL Classification: G12, G14, G41

Suggested Citation

Akbas, Ferhat and Ay, Lezgin and Koch, Paul D., Initial Margin Requirements and Market Efficiency (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=3792433 or http://dx.doi.org/10.2139/ssrn.3792433

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Lezgin Ay (Contact Author)

Iowa State University - Department of Finance, Ph.D. Student ( email )

Ames, IA 50011
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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