Margin requirements and equilibrium asset prices$

This paper studies the effect of margin requirements on asset prices and trading volume in a general equilibrium asset pricing model where Epstein–Zin investors differ in their degree of risk aversion. Under the assumptions of unit intertemporal elasticity of substitution and zero net supply of riskless assets, I show analytically that binding margin requirements do not affect stock prices. This result stands in contrast to previous partial equilibrium analysis where fixed margin requirements increase the volatility of stock prices. In this framework, binding margin requirements induce a fall in the riskless rate, increase its volatility, and increase stock trading volume. r 2005 Elsevier B.V. All rights reserved