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Rethinking Margin and Volatility

This paper tests whether margin requirements cause asset price volatility. Using novel data on margin requirements and by exploiting exogenous variation from a threshold-based regression discontinuity design, I document that increasing margin causes a persistent decrease in future volatility (negative level effect) and a decline in trading volume. For an average 13.7% increase in margin requirement, I find an average 3.7% decrease in volatility. These results contrast with prior empirical studies that largely find no relationship between volatility and margin and provide support for the efficacy of financial market policies that seek to curb excess market volatility.