An Active Margin System and its Application in Chinese Margin Lending Market
Guanghui Huang,
Jianping Wan and
Cheng Chen
Papers from arXiv.org
Abstract:
In order to protect brokers from customer defaults in a volatile market, an active margin system is proposed for the transactions of margin lending in China. The probability of negative return under the condition that collaterals are liquidated in a falling market is used to measure the risk associated with margin loans, and a recursive algorithm is proposed to calculate this probability under a Markov chain model. The optimal maintenance margin ratio can be given under the constraint of the proposed risk measurement for a specified amount of initial margin. An example of such a margin system is constructed and applied to $26,800$ margin loans of 134 stocks traded on the Shanghai Stock Exchange. The empirical results indicate that the proposed method is an operational method for brokers to set margin system with a clearly specified target of risk control.
Date: 2011-01
New Economics Papers: this item is included in nep-ban, nep-cmp, nep-rmg and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1101.3974
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