Revisiting the empirical estimation of the effect of margin changes on futures trading volume

This study revisits the empirical estimation of the effect of margin requirements on trading volume. Although theory suggests that margin requirements impose a cost to traders and will therefore likely reduce volume traded, empirical examinations have generally failed to find this association. The contention of this article is that the theory is correct, but empirical estimation has generally neglected to adjust margins for underlying price risk. After adjusting for risk, this analysis finds economically and statistically significant negative effects of margin requirements on trading volume as predicted by theory. This study examined 6 contracts over a 17‐year time period and found that financial futures contracts (gold, Dow Jones, and 10‐Year Treasury Notes) were considerably more sensitive to changes in margin requirements than agricultural futures (wheat, corn, and oats). © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:561–576, 2003