Effects of individual margin requirement and risk preference on individual margin trading

Abstract

Using a total of 25,000 individual accounts provided by the Taiwan Stock Exchange Corporation, this paper discusses the methodologies used for securities margin trading and explores whether a difference in the individual margin requirements and risk preferences set by investors would change the securities margin trading ratio. The individual margin requirements set by investors depending on the degree of leverage regarding investment targets. And, the margin trading ratios set by investors depending on the size of their leveraged positions. Therefore, investors can adjust the risks associated with investment portfolios according to the degree of leverage and leveraged positions. In addition, because the degree of risk aversion exhibited by individual investors varied, the investment portfolio risks differed. This study explores whether risk preference influences the relationship between the individual margin requirement set by investors and the margin trading ratio they adopt. The empirical results indicate that the investors adopt a low margin trading ratio when they set a high individual margin requirement. The trading mechanism for individual margin requirements can reduce volatility effects and mitigate the influences exerted on individual margin trading. Moreover, a low degree of risk preference increases the sensitivity of individual margin requirements toward individual margin trading.