The Impact of Changes in Margin Requirements on Market Microstructure: An Intermarket Analysis
Posted: 15 Sep 1999
Date Written: March 12, 1994
This paper examines the impact of two changes in margin requirements for equity options on the microstructure of the market for the options and the underlying stocks. Our results indicate that the margin increase was associated with decreases in quoted bid-ask spreads, daily transaction volume, and daily volatility, and an increase in quoted depth for the underlying stocks, with the opposite being true after the margin decrease. In addition, we find the impact on the options market to be the opposite of that on the underlying stock market. Our results also indicate that the margin decrease was associated with an increase in the informativeness of stock trades, and a decrease in the variance of the pricing error in the stock market. In contrast, there was a marginally significant decrease in informativeness and no change in pricing efficiency after the margin decrease.
JEL Classification: G13, G14
Suggested Citation: Suggested Citation