Margin requirements and futures activity: Evidence from the soybean and corn markets

This article investigates the impact of margin requirements on the trading activity and volatility in futures markets, We extend Hartzmark's (1986) mo del for futures demand to allow for the costs imposed by margins to change across the maturity of the contract. The model is tested employing data fro m the soybean and corn markets. We find that trading activity becomes more sensitive to margin changes as one gets closer to contract maturity, incons istent with the notion that margins impose important opportunity costs on f utures traders. Margins are found to have a negative impact on the trading activities of all types of traders, though there is some evidence that marg in alterations bring about changes in the makeup of the market. The data al so indicate that margins are likely to be hiked during periods of increased volatility, and reduced during periods of relative stability, thus suggest ing that margin alterations serve primarily as insurance to futures exchang es. (C) 1999 John Wiley & Sons, Inc.