Market Responses to Federal Reserve Changes in the Initial Margin Requirement

The Federal Reserve (Fed) System's Board of Governors is empowered to impose margin requirements on securities loans which it has altered 21 times since 1934. The response of the market to the change differs depending upon whether it is an increase or a decrease in the requirement. Given this a...

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Bibliographic Details
Published in:The Journal of finance (New York) 1979-06, Vol.34 (3), p.659-674
Main Authors: GRUBE, R. CORWIN, JOY, O. MAURICE, PANTON, DON B.
Format: Article
Language:English
Subjects:
Arithmetic mean
Changes
Federal Reserve Bank
Financial margins
Impacts
Investors
Margin requirements
Market prices
Residual volume
Returns
Securities markets
Stock
Stock exchanges
Stock markets
Stock prices
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Summary:The Federal Reserve (Fed) System's Board of Governors is empowered to impose margin requirements on securities loans which it has altered 21 times since 1934. The response of the market to the change differs depending upon whether it is an increase or a decrease in the requirement. Given this assymetric market response, increases in the requirement significantly increase the volume of trading activity but do not alter investor expectations enough to introduce different consensus prices. Responses to decreases include: 1. Strong price and volume responses are evidenced. 2. The market interprets decreases favorably. 3. The market responds instaneously to the announcement of a decrease, and does not react in the post-announcement period. Given the absence of negative returns to increases in the requirement by the market, the Fed is thus called into question on the efficacy of intervention in the securities market due to the lack of investor response. Given the results, the Fed may be viewed as having failed at either: 1. providing the market with a clear signal of its expectations, or 2. altering requirements without affecting investor expectations. Given the response in the case of a decrease, however, the Fed may be considered successful.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1979.tb02132.x