Margin Trading: Hedonic Returns and Real Losses

49 Pages Posted: 12 Apr 2016

See all articles by Daniel Ladley

Daniel Ladley

University of Leicester - School of Business

Guanqing Liu

University of Leicester - Department of Economics

James Rockey

University of Birmingham - Department of Economics

Date Written: April 10, 2016

Abstract

Margin trading is popular with retail investors around the world. This is a puzzle, since, as we show, it has a negative expected return. Our explanation is that whilst lowering mean returns, the collateral requirement imposed by margin calls induces positive skew in the distribution of returns. Investments in assets with symmetric returns now offer limited losses and a small chance of a large gain, like lottery tickets and other gambles. Results from a unique dataset of retail futures traders show that actual losses are substantial. Traders’ behaviour is demonstrated to be best understood as motivated by hedonic returns.

Keywords: Margin Trading, Hedonic Trading, Gambling, Recreational Investors

JEL Classification: G02, G11, G13

Suggested Citation

Ladley, Daniel and Liu, Guanqing and Rockey, James Charles, Margin Trading: Hedonic Returns and Real Losses (April 10, 2016). Available at SSRN: https://ssrn.com/abstract=2762219 or http://dx.doi.org/10.2139/ssrn.2762219

Daniel Ladley (Contact Author)

University of Leicester - School of Business ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Guanqing Liu

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

James Charles Rockey

University of Birmingham - Department of Economics ( email )

University House
University of Birmingham
116 Edgbaston Park Rd, Birmingham B15 2TY
United Kingdom

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