Margin Purchases and Short Sales in Emerging Markets: Their Rationales and Design Variables

World Bank Financial Sector Paper Series

64 Pages Posted: 15 Jan 2009

See all articles by Tadashi Endo

Tadashi Endo

Yamanashi Eiwa College

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Date Written: May 1, 2006

Abstract

Emerging equity markets generally need an exogenous liquidity supply in order to accelerate their development. Margin trading (margin purchases and short sales) represents an important vehicle which promotes exogenous supply of market liquidity. Adequately regulated margin trading can induce relatively powerful and fast liquidity recoveries after market corrections or crashes. Vital to margin trading is a stock borrowing and lending system. Margin purchase and short sale facilities require regulators, financial intermediaries, and investors to have heightened risk management skills in addition to robust market infrastructure. Despite their standardized features, the actual design and operation of the market infrastructure necessary for margin trading should be country- or market-specific. The characteristics and composition of factors affecting the design and operation are dynamic and the key components of this important market infrastructure must be flexible so that they can change over time.

Keywords: Emerging markets, Margin purchases, Short sales, Short selling, Stock borrowing and lending

JEL Classification: G14, G15, G18

Suggested Citation

Endo, Tadashi and Rhee, S. Ghon, Margin Purchases and Short Sales in Emerging Markets: Their Rationales and Design Variables (May 1, 2006). World Bank Financial Sector Paper Series. Available at SSRN: https://ssrn.com/abstract=1327309 or http://dx.doi.org/10.2139/ssrn.1327309

Tadashi Endo (Contact Author)

Yamanashi Eiwa College ( email )

888
Yokone-Machi
Kofu, Yamanashi 400-8555
Japan

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

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