Should retail investors’ leverage be limited?

Rawley Heimer and Alp Simsek

Journal of Financial Economics, 2019, vol. 132, issue 3, 1-21

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.

Keywords: Leverage restriction policy; Foreign exchange market; Retail trading; Speculation; Consumer financial protection (search for similar items in EconPapers)
JEL-codes: D84 G11 G12 G18 G24 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X18303076
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:132:y:2019:i:3:p:1-21

DOI: 10.1016/j.jfineco.2018.10.017

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().