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.
Original language | English |
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Pages (from-to) | 107-136 |
Number of pages | 30 |
Journal | Journal of Economic Behavior and Organization |
Volume | 172 |
DOIs | |
Publication status | Published - Apr 2020 |
Bibliographical note
Publisher Copyright:© 2020 Elsevier B.V.
Copyright:
Copyright 2020 Elsevier B.V., All rights reserved.
Keywords
- Financial regulation
- Margin requirement
- Margin trading
- Retail investors
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management