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Chicago Fed Letter, No. 46, June 1991
Futures Margin and Excess Volatility

On October 19, 1987, the Dow Jones Industrial Average dropped 22.61%, its largest ever percentage decline. The event aroused concern that the stock market was becoming excessively volatile. The 6.91% decline on October 13, 1989, heightened these concerns. Some charge that the relatively low margin levels required for positions in stock index futures contribute to the magnitude of stock price changes. In particular, according to this view, the problem is that margins required for stock futures are lower than margins required for stocks. According to this view, margin requirements for stocks and stock future should be equal. I disagree with this claim.



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