Losing money on the margin

Daniel Ladley (), Guanqing Liu and James Rockey

Journal of Economic Behavior & Organization, 2020, vol. 172, issue C, 107-136

Abstract: Margin trading is popular with retail investors around the world. To limit the scale of these investors’ potential losses, regulators impose a system of collateral requirements and margin calls. 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. This leads us to question whether current regulation is appropriate.

Keywords: Margin trading; Margin requirement; Financial regulation; Retail investors (search for similar items in EconPapers)
JEL-codes: G02 G11 G13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:172:y:2020:i:c:p:107-136

DOI: 10.1016/j.jebo.2020.01.027

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