Using daily and monthly stock returns, the authors find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Gikas Hardouvelis (1988), is traced to flows in his test design. The authors do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. They also confirm the recent finding by William Schwert (1988) that changes in margin requirements by the Fed have tended to follow, rather than lead, changes in market volatility.

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a, b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility.

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a , b ), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility.