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

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  • Guanghui Huang
  • Jianping Wan
  • Cheng Chen

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.

Suggested Citation

  • Guanghui Huang & Jianping Wan & Cheng Chen, 2011. "An Active Margin System and its Application in Chinese Margin Lending Market," Papers 1101.3974, arXiv.org.
    • Handle: RePEc:arx:papers:1101.3974
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    Cited by:

    1. 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.

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