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Extendible stock loan

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  • Wu, Wei-Hwa

Abstract

In this paper, the model of extendible stock loan with forbearance is proposed. The loan is extendible, so as to prevent immediate losses or to prevent subsequent price drop; while the forbearance is granted only when the pledged share’s value is above threshold, so as to mitigate the risk-taking behavior induced by the extension. The non-synchronization of the liquidation of insolvent stock loans also alleviates the downward leverage spiral in a market downturn. Numerical analysis shows that fair extendible stock loan rates increase with the forbearance level as well as extension period, and loan rates are quite sensitive to the change of asset volatility and debt ratio. For lenders waiving the interest rates during extension period, their burden grows with extension rapidly when they grant looser forbearance and when asset volatility or loan-to-value is higher. Some suggestions are made accordingly. First, lenders offering uniform extendible loan rate can let borrowers choose between looser forbearance with shorter extension, or tighter forbearance with longer extension. Second, if the loan rate is priced fairly, lower margin requirement can only be accomplished with tighter forbearance. More looser forbearance worth higher rates.

Suggested Citation

  • Wu, Wei-Hwa, 2021. "Extendible stock loan," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001595
    DOI: 10.1016/j.najef.2021.101549
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    More about this item

    Keywords

    Maturity extension; Stock loan; Downward spiral; Default forbearance; Compound options;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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