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Margin Trading: Hedonic Returns and Real Losses

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Listed:
  • Daniel Ladley
  • Guanqing Liu
  • James Rockey

Abstract

Margin trading is popular with retail investors around the world. This is a puzzle, since, as we show, it has a negative expected return. Our explanation is that whilst lowering mean returns, the collateral requirement imposed by margin calls induces positive skew in the distribution of returns. Investments in assets with symmetric returns now offer limited losses and a small chance of a large gain, like lottery tickets and other gambles. Results from a unique dataset of retail futures traders show that actual losses are substantial. Traders’ behaviour is demonstrated to be best understood as motivated by hedonic returns.

Suggested Citation

  • Daniel Ladley & Guanqing Liu & James Rockey, 2016. "Margin Trading: Hedonic Returns and Real Losses," Discussion Papers in Economics 16/06, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:16/06
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp16-06.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Margin Trading; Hedonic Trading; Gambling; Recreational Investors;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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