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arXiv · 1101.3974

An Active Margin System and its Application in Chinese Margin Lending Market

Guanghui Huang·Jianping Wan·Cheng Chen
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Abstract

In 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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Guanghui Huang, Jianping Wan, Cheng Chen. 2011-01-20. An Active Margin System and its Application in Chinese Margin Lending Market. https://arxiv.org/abs/1101.3974

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