• Margin requirements and volatility : evidence from Canadian stocks

      Lee, Kwan Yiu; Faculty of Business Programs (Brock University, 2010-03-09)
      Margin policy is used by regulators for the purpose of inhibiting exceSSIve volatility and stabilizing the stock market in the long run. The effect of this policy on the stock market is widely tested empirically. However, most prior studies are limited in the sense that they investigate the margin requirement for the overall stock market rather than for individual stocks, and the time periods examined are confined to the pre-1974 period as no change in the margin requirement occurred post-1974 in the U.S. This thesis intends to address the above limitations by providing a direct examination of the effect of margin requirement on return, volume, and volatility of individual companies and by using more recent data in the Canadian stock market. Using the methodologies of variance ratio test and event study with conditional volatility (EGARCH) model, we find no convincing evidence that change in margin requirement affects subsequent stock return volatility. We also find similar results for returns and trading volume. These empirical findings lead us to conclude that the use of margin policy by regulators fails to achieve the goal of inhibiting speculating activities and stabilizing volatility.