THE IRRELEVANCE OF MARGIN - EVIDENCE FROM THE CRASH OF 87

Following the crash of 1987, one contentious regulatory issue has been whether margin activity exacerbated the decline in equity values. We contrast the crash behavior of NASDAQ securities eligible for margin trading with the behavior of ineligible ones. Consistent with the hypothesis that margin-eligible securities were more frequently subjected to margin calls and forced sales, we find that abnormal volumes were uniformly larger for eligible securities. However, there is no evidence that this activity provoked additional price depreciation. Margin-eligible securities actually fell by one percent less than the ineligible securities over the period.