The Effectiveness of Margin Requirements: Agent-Based Modeling Approach

Yi-Feng Tzeng, Chung-Yi Yang () and Chia-Hsuan Yeh
Additional contact information
Chung-Yi Yang: Information Management Yuan-Ze University

No 79, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: The stock market crash in 1929 has raised many discussions about the causes and the ways to prevent the financial markets from large fluctuations. The role of the margin loan has usually been regarded as the source of instability in financial markets. The view that low margin infused excessive funds into the stock market was widely accepted at that time. Therefore, the Board of Governors of the Federal Reserve System was authorized by the Securities and Exchange Act to impose initial margin requirements on stock markets in October, 1934, which was previously set by the New York Stock Exchange and other private-sector exchanges. The original purposes of this regulation are three-fold: (1) to reduce excessive credit, and lead more credit toward productive uses, (2) to protect investors from speculative losses due to too much debt, and (3) to reduce price fluctuations caused by margin buying and short selling. In the literature, the discussion of the effectiveness of margin requirements has continued for more than forty years. Besides the controversy of academic research, both the Government and the Fed also possessed different opinions in the past twenty years. The reason that margin loans are believed to increase price volatility is described as a ``pyramiding-depyramiding'' process. The pyramiding-depyramiding process seems to be reasonable but can not be easily justified. The implicit assumption behind this process is that speculation is the source of instability. In this paper, we examine the effectiveness of margin requirements based on the times series properties of price and return volatility as well as their relations with trading volume under the framework of agent-based artificial stock market in which trader' behavior is modeled by genetic programming

Keywords: Margin Requirements; Speculation; Agent-Based Modeling; Genetic Programming (search for similar items in EconPapers)
JEL-codes: D83 D84 G11 (search for similar items in EconPapers)
Date: 2005-11-11
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:sce:scecf5:79

Access Statistics for this paper

More papers in Computing in Economics and Finance 2005 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().