Stock volatility and margin trading

Abstract

This study examines additions of OTC issues to the list of marginable securities and tests the hypothesis that margin trading destabilizes prices and contributes to volatility. No detrimental effects are found. Instead, evidence suggests that margin eligibility increases the flow of information and enhances depth. Though volumes are 30% larger, volatility and noise decrease with the inception of margin trading. Further, margin eligibility is valuable: increases in value of 2% occur upon the announcement of eligibility. Analysis of a small sample of margin eligibility revocations provides no evidence that tightening margin restrictions reduces volatility.

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