The Design Of Active Margin System

Margin system for the margin loans using cash and stock as collateral is considered in thispaper. The conditional probability of negative return is used to measure the risk faced bybrokers. The resulted margin system is an active system, which is able to adjust actively withrespect to the changes of stock prices, called the deduced margin system in this paper.The resulted margin system is compared with the system required by the Shanghai StockExchange, where25,200margin loans of126stocks listed on the SSE are investigated. Themean of those observed initial margin. ratios is55%, and the mean of those maintenance marginratios is118%，In the conditions that initial margin is identical equal,the average number ofmargin calls is45.79. Under the required margin system, and its counterpart under the deducedmargin system is18:41, which is reduced by59:8%with respect to the former. The average costunder the deduced margin system is8:76, which is similar to its counterpart under the requiredmargin system. It is found that the number of margin calls under the proposed margin system issignificantly less than its counterpart under the required system, and the average costs of theloans are similar under the two types of margin systems.The stock market under the deduced margin system is more stable than the one under therequired margin system. Those observations indicate that CPNR can be used to measure the riskfaced by brokers, and the deduced margin system is beneficial to the stability of stock market.