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Should Retail Investors' Leverage Be Limited?

Rawley Z. Heimer, Alp Simsek

NBER Working Paper No. 24176
Issued in December 2017, Revised in June 2019
NBER Program(s):Asset Pricing Program, Corporate Finance Program

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.

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Document Object Identifier (DOI): 10.3386/w24176

Published: Rawley Heimer & Alp Simsek, 2018. "Should Retail Investors’ Leverage Be Limited?," Journal of Financial Economics, .

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