Should retail investors’ leverage be limited?
Name
w24176.pdf
Description
Accepted version
Size
510.18 KB
Format
Adobe PDF
Checksum (MD5)
4956ea268af4ba7c354aa8a0eac75b05
Author(s)
Heimer, Rawley
Simsek, Alp
Date Issued
2019
Journal
Journal of Financial Economics
Publisher
Elsevier BV
Version
Author's final manuscript
Abstract
© 2018 Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage-constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/J.JFINECO.2018.10.017
