Brown Bag Seminar with Petri Jylha, Imperial College London
The Department of Finance and FRIC Center for Financial Frictions are happy to announce the upcoming Brown Bag Seminar with Petri Jylha, Imperial College London.
Petri Jylha will present:
Between the years 1934 and 1974, the Federal Reserve actively managed the initial margin requirement in the U.S. stock market. I use this exogenous variation in margin requirements to test whether funding constraints affect the security market line, i.e. the relation between betas and expected returns. Consistent with the theoretical predictions of Frazzini and Pedersen (2013), but somewhat contrary to their empirical findings, I find that tighter funding constraints result in a flatter security market line. My results provide strong empirical support for the idea that leverage constraints faced by investors may, at least partially, help explain the empirical failure of the capital asset pricing model.