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Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral

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  • Guanghui Huang
  • Wenting Xin
  • Weiqing Gu

Abstract

An active margin system for margin loans is proposed for Chinese margin lending market, which uses cash and randomly selected stock as collateral. The conditional probability of negative return(CPNR) after a forced sale of securities from under-margined account in a falling market is used to measure the risk faced by the brokers, and the margin system is chosen under the constraint of the risk measure. In order to calculate CPNR, a recursive algorithm is proposed under a Markov chain model, which is constructed by sample learning method. The resulted margin system is an active system, which is able to adjust actively with respect to the changes of stock prices and the changes of different collateral. The resulted margin system is applied to 30,000 margin loans of 150 stocks listed on Shanghai Stock Exchange. The empirical results show the number of margin calls and the average costs of the loans under the proposed margin system are less than their counterparts under the system required by SSE and SZSE.

Suggested Citation

  • Guanghui Huang & Wenting Xin & Weiqing Gu, 2012. "Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral," Papers 1202.4913, arXiv.org, revised Feb 2012.
    • Handle: RePEc:arx:papers:1202.4913
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    References listed on IDEAS

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    1. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    2. Guanghui Huang & Jianping Wan & Cheng Chen, 2011. "An Active Margin System and its Application in Chinese Margin Lending Market," Papers 1101.3974, arXiv.org.
    3. Peter Fortune, 2000. "Margin requirements, margin loans, and margin rates: practice and principles," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 19-44.
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