An Active Margin System and its Application in Chinese Margin Lending Market
AbstractIn 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.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1101.3974.
Date of creation: Jan 2011
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
- NEP-BAN-2011-01-30 (Banking)
- NEP-CMP-2011-01-30 (Computational Economics)
- NEP-RMG-2011-01-30 (Risk Management)
- NEP-TRA-2011-01-30 (Transition Economics)
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