Economy – Quantitative Finance – Risk Management
Scientific paper
2012-02-23
Economy
Quantitative Finance
Risk Management
16 pages, 5 tables. arXiv admin note: significant text overlap with arXiv:1101.3974
Scientific paper
Margin system for margin loans using cash and stock as collateral is considered in this paper, which is the line of defence for brokers against risk associated with margin trading. The conditional probability of negative return is used as risk measure, and a recursive algorithm is proposed to realize this measure under a Markov chain model. Optimal margin system is chosen from those systems which satisfy the constraint of the risk measure. The resulted margin system is able to adjust actively with respect to the changes of stock prices. The margin system required by the Shanghai Stock Exchange is compared with the proposed system, where 25,200 margin loans of 126 stocks listed on the SSE are investigated. It is found that the number of margin calls under the proposed margin system is significantly less than its counterpart under the required system for the same level of risk, and the average costs of the loans are similar under the two types of margin systems.
Gu Weiqing
Huang Guanghui
Li Hongyu
Xing Wenting
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