Leverage is a Double-Edged Sword

83 Pages Posted: 28 May 2021 Last revised: 8 Dec 2021

See all articles by Avanidhar Subrahmanyam

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Jingyuan Wang

Beihang University (BUAA)

Xuewei Yang

Nanjing University - School of Management and Engineering; Nanjing University - Institute of New Finance

Date Written: May 28, 2021

Abstract

We use proprietary data on intraday transactions at a futures brokerage to analyze the mechanisms by which implied leverage influences trading performance, conditional on investor skill. We measure skill during a training period, and analyze performance out of sample. Leverage stimulates de facto liquidity provision by skilled investors, and enhances their daily returns by 19.3 bps per unit. Unskilled investors’ leverage amplifies their losses, particularly those stemming from gambling proclivity. Across all individuals and institutions, forced liquidations largely account for the negative impact of leverage on performance. Regulatory increases in required margins decrease (enhance) skilled (unskilled) investors’ performance.

Keywords: Leverage, Futures, Margin call, Smart investors, Trading performance

JEL Classification: D03, D81, G02, G12, G23

Suggested Citation

Subrahmanyam, Avanidhar and Tang, Ke and Wang, Jingyuan and Yang, Xuewei, Leverage is a Double-Edged Sword (May 28, 2021). Available at SSRN: https://ssrn.com/abstract=3855181 or http://dx.doi.org/10.2139/ssrn.3855181

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

Jingyuan Wang

Beihang University (BUAA) ( email )

37 Xue Yuan Road
Beijing 100083
China

Xuewei Yang (Contact Author)

Nanjing University - School of Management and Engineering ( email )

22 Hankou Road, Gulou District
Nanjing, Jiangsu 210093
China

Nanjing University - Institute of New Finance ( email )

Nanjing, Jiangsu 210093
China

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