Margin Trading: Hedonic Returns and Real Losses

Daniel Ladley (), Guanqing Liu () and James Rockey

No 16/06, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: G02 G11 G13 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-mst and nep-rmg
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