Margin call risk and leverage constraints: exploring investment horizons and low-risk anomalies in futures markets

Purpose - In futures markets, margin trading not only relaxes leverage constraints but also entails the risk of margin calls. Therefore, existing studies provide inconsistent evidence on low-risk anomalies, raising challenges in understanding leverage constraints in futures markets. This study aims to address this gap by focusing on margin call risk. Through bootstrap simulations with historical datasets, we find that margin call risk increases with longer investment horizons regardless of the initial margin, maintenance margin or individual futures volatilities. We also find that investors generally prefer higher leverage but adjust it in response to margin call risks across all futures sectors, leading them to opt for lower leverage for longer holding periods. Thus, while low-risk anomalies demonstrate statistical significance over longer investment horizons, their significance decreases for shorter investment horizons, such as less than six months. Our findings suggest that investors with sufficiently short holding periods are less likely to face leverage constraints in futures markets, especially the commodity, currency and bond futures markets.