Losing Money on the Margin

49 Pages Posted: 6 Feb 2017

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: January 16, 2017

Abstract

Margin trading is popular with retail investors around the world. We show in this paper, however, that the collateral requirement imposed by margin calls results in negative expected returns for these traders whilst also inducing positive skew in the returns distribution. Investments in assets with symmetric returns, when traded on margin, instead offer limited losses and a small chance of a large gain, much like lottery stocks and other gambles. We demonstrate this theoretically and then show empirically, using a unique database of account data from a Chinese retail brokerage, that the realized losses of margin traders are often substantial.

Keywords: Margin Trading, Margin Requirement, Skewness Preference, Retail Investors

JEL Classification: G02, G11, G13

Suggested Citation

Ladley, Daniel and Liu, Guanqing and Rockey, James Charles, Losing Money on the Margin (January 16, 2017). Available at SSRN: https://ssrn.com/abstract=2912190 or http://dx.doi.org/10.2139/ssrn.2912190

Daniel Ladley

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 (Contact Author)

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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