Analyzing the Relationship Between Outstanding Margin Debt and the Stock Market – Tutorial
Is outstanding margin related to the stock market?
Many investors believe new highs in margin debt precede a decline in the stock market. In this tutorial, we will analyze the relationship between the level of outstanding margin debt and the stock market.
First, let’s talk about what margin debt is. Margin debt is the amount of money investors have borrowed using their investments as collateral. In other words, investors can borrow money from a bank or brokerage in order to buy more securities. There are regulations pertaining to borrowing against your investments. Most blue chip stocks have an initial margin limit of 50%. This means that investors can buy $1,500 worth of stock for every $1,000 cash deposited in an account.
So why would investors do that? Many investors believe their investments will produce a return higher than the cost (interest paid on borrowed money) of borrowing. For example, if an investor believes their investments will produce a 10% rate of return, they should be willing to pay 5% interest in order to buy more investments. This alone is not a good reason to use margin. The use of leverage can be as dangerous as it is advantageous. It has been said that fools should never use leverage and that smart people don’t need it. In this tutorial, we will examine the relationship between the use of margin and stock prices.
We will begin by downloading historical margin borrowing from www.nyxdata.com. Once downloaded, there will be some data cleanup, followed by a download of the daily S&P 500 close from finance.yahoo.com. We will then match the data on a monthly basis, analyze the data, and then create a chart.
I think you will find this tutorial informative and interesting. This tutorial the formulas VLOOKUP and CORREL (for calculating correlation).
Click Here to access the tutorial.
Let me know if you have questions about this model or ideas for future models. Happy modeling!
