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Margin Requirements and the Security Market Line
Author(s) -
JYLHÄ PETRI
Publication year - 2018
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12616
Subject(s) - leverage (statistics) , capital asset pricing model , margin (machine learning) , security market line , economics , econometrics , financial economics , stock (firearms) , stock market , business , computer science , engineering , mechanical engineering , paleontology , horse , biology , machine learning
Between 1934 and 1974, the Federal Reserve changed the initial margin requirement for the U.S. stock market 22 times. I use this variation to show that investors' leverage constraints affect the pricing of risk. Consistent with earlier theoretical predictions, I find that tighter leverage constraints result in a flatter relation between betas and expected returns. My results provide strong empirical support for the idea that the constraints investors face may help explain the empirical failure of the capital asset pricing model.