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Should Retail Investors' Leverage Be Limited?

Rawley Heimer () and Alp Simsek

No 24176, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G02 G11 G12 G18 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2017-12
Note: AP CF
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Published as Rawley Heimer & Alp Simsek, 2018. "Should Retail Investors’ Leverage Be Limited?," Journal of Financial Economics, .

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