The Impact of Changes in Margin Requirements on Market Microstructure: An Intermarket Analysis

Posted: 15 Sep 1999

See all articles by Stewart Mayhew

Stewart Mayhew

Cornerstone Research

Atulya Sarin

Santa Clara University - Department of Finance

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: March 12, 1994

Abstract

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

Mayhew, Stewart and Sarin, Atulya and Shastri, Kuldeep, The Impact of Changes in Margin Requirements on Market Microstructure: An Intermarket Analysis (March 12, 1994 ). Available at SSRN: https://ssrn.com/abstract=5492

Stewart Mayhew

Cornerstone Research ( email )

1919 Pennsylvania Avenue NW
Suite 600
Washington, DC 20006-3420
United States

Atulya Sarin

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

Kuldeep Shastri (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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