Margin Requirements and the Security Market Line

Petri Jylhä*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

36 Citations (Scopus)
791 Downloads (Pure)


Between 1934 and 1974, the Federal Reserve changed the initial margin requirement for the U.S. stock market 22 times. I use this variation to show that investors' leverage constraints affect the pricing of risk. Consistent with earlier theoretical predictions, I find that tighter leverage constraints result in a flatter relation between betas and expected returns. My results provide strong empirical support for the idea that the constraints investors face may help explain the empirical failure of the capital asset pricing model.

Original languageEnglish
Pages (from-to)1281-1321
Number of pages41
JournalJournal of Finance
Issue number3
Publication statusPublished - Jun 2018
MoE publication typeA1 Journal article-refereed


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