Signal on the Margin: Behavior of Levered Investors and Future Economic Conditions*
Prachi Deuskar,
Nitin Kumar and
Jeramia Allan Poland
Review of Finance, 2020, vol. 24, issue 5, 1039-1077
Abstract:
Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (i) lower S&P 500 returns, (ii) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (iii) higher macro, financial, and policy uncertainty, (iv) lower interest rates, (v) tighter lending standards by banks, and (vi) lower intermediary equity capital. High margin capacity is a precursor, not a response, to borrowing and intermediary constraints and higher volatility. It typically arises when levered investors with profitable past positions limit their leverage. We interpret that it reflects informed investors’ conservatism ahead of bad times.
Keywords: Margin debt; Economic conditions (search for similar items in EconPapers)
JEL-codes: G10 G12 G17 (search for similar items in EconPapers)
Date: 2020
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