Losing Money on the Margin
49 Pages Posted: 6 Feb 2017
Date Written: January 16, 2017
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: Suggested Citation