Did Margin Rules and Financial Development Affect Returns and Volatility - During the Market Crash of 2007-2008?

Posted: 21 May 2019

Date Written: April 30, 2009

Abstract

I found that rigid margin rules significantly reduced the weekly index return volatility during the crash period and also reduced the change in weekly index return volatility compared to the past 5 years. I found no evidence that margin rules had any impact on returns during the crash period, refuting the pyramiding hypothesis. I found that return volatility was positively related to financial development during the crash period but negatively related to volatility before the crash period, suggesting the cause of the crash centered in the financially developed world. Regulators from around the world would be interested in how margin rules on different exchanges can increase or dampen returns or volatility during extreme market movements and how financial development interacts with return volatility during extreme market conditions.

Keywords: Volatiltiy, Crash, Financial Development, Margin Rules

Suggested Citation

Johnson, William Fount, Did Margin Rules and Financial Development Affect Returns and Volatility - During the Market Crash of 2007-2008? (April 30, 2009). Journal of Investing, Forthcoming, https://doi.org/10.3905/joi.2010.19.3.033, Available at SSRN: https://ssrn.com/abstract=1397274

William Fount Johnson (Contact Author)

University of Memphis - Finance ( email )

United States

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