Margin Trading: Hedonic Returns and Real Losses
49 Pages Posted: 12 Apr 2016
Date Written: April 10, 2016
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: Suggested Citation