Stock Margins and the Conditional Probability of Price Reversals

Paul Kofman and James Moser

No 267625, Department of Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: Levels of required margin are shown to be positively related to autocorrelations in stock returns, a result which implies that the probability of nontrading increases when margin levels increase. Frequencies of stock-price reversals are studied to determine the effect of margin requirements on participation by information traders. If price reversals are negatively (positively) related to high levels of margin, then relative proportions of information traders increase (decrease). We find that reversals occur more. frequently prior to the regulation of margin in 1934. This date coincides with a general increase in the level of margins. Our logit specifications indicate that reversal probabilities are conditional on the level of margin. Controls for the effects of time and the introduction of regulation do not alter this conclusion. The results suggest that margin costs reduce stock market participation with a lesser effect on information based trading.

Keywords: Production Economics; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 23
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Related works:
Journal Article: Stock margins and the condition probability of price reversals (2001)
Working Paper: Stock margins and the conditional probability of price reversals (1993)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:monebs:267625

DOI: 10.22004/ag.econ.267625

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