Leveraged Trading,Price Limit,and Liquidity Risk Under The Background Of Stock Market Crisis

In 2015,China's stock market experienced its worst ever crash,which made leveraged trading and price limits become the focus of attention.Meanwhile,liquidity risk has already become a research hotspot in the field of market microstructure,and understanding the relationship between liquidity risk and asset pricing also has become the core of understanding the financial crisis.From the perspective of market microstructure,this dissertation studies the impact of both leveraged trading and price limits on liquidity risk,namely liquidity commonality,of stock markets in the situation of market crash using the data from China's stock markets before and after the crash.The main contents and conclusions are summarized as follow:Firstly,this dissertation analyzes the micro-mechanism of the 2015 stock market crash,and theoretically investigates the mechanism of illiquidity contagion which gives rise to liquidity commonality in the situation of stock market crisis from the perspective of liquidity providers by constructing models under the framework of rational expectation.The results indicate that the key channels for the generation of illiquid contagion are the proportion of liquidity providers who are price watchers,the amount of information that price watchers can obtain from the price changes of another risky asset,and the uncertainty of exogenous liquidity demand.On this basis,the inference of this dissertation is that when the liquidity of one asset tends to disappear due to deleveraging or daily limit hit,the liquidity of other assets will be exacerbated because of a decrease in the information available to price watcher in their liquidity providers,or a decrease in the uncertainty of their liquidity demand,which generates illiquidity contagion,and further causes liquidity co-movement.Secondly,this dissertation empirically analyzes the availability of four liquidity measures,namely liquidity rate,illiquidity proxy and another two adjusted illiquidity proxies using trading data from 2012 to 2016 of stocks selected from Shanghai and Shenzhen A-share market.By comparing these four liquidity mesures to benchmarks,namely price impact and VWPIN,the results show that(adjusted)illiquidity proxy are efficient low-frequency liquidity measure under any market situation.Thirdly,this dissertation investigates the varies of the up limit in stock prices and the reason why the difference exists during the boom of China's stock market in 2015 using daily data from 2012 to 2015 of stocks selected from Shanghai and Shenzhen Ashare main board market and allowed margin trading.The results show that the less liquid stocks before the boom hit the ceiling price limit more times,and the reason for that is that these stocks experience much more improvement in liquidity during the boom due to the difference in leveraged trading,which implies that leveraged trading is the real reason for the abnormal occurrence.Fourthly,this dissertation empirically analyzes the impact of leveraged trading on stocks' liquidity commonality,and whether the liquidity commonality can explain the decline of stock price during the market crash using daily trading data from 2014 to 2015 of stocks selected from Shanghai and Shenzhen A-share market.The results indicate that leveraged trading is a driving factor for the liquidity commonality,and the funding constraint brought by leveraged trading is the key reason for the rise of stock's liquidity commonality during the market crash.Furthermore,the results also show that the degree of liquidity commonality of individual stock has significantly positive impact on the decline of stock price.Finally,this dissertation empirically studies the liquidity spillover effect of price limits during the crash using daily trading data selected from Shenzhen A-share stocks.The results show that the price limits hit significantly affect the next day's liquidity of limit-hitting stocks and the liquidity of the stocks in the same industry as hitting stock,which indicate that there is a clear liquidity spillover effect of price limits.Furthermore,this dissertation also empirically investigates the characteristics of several market microstructural indicators before price limits hit.The results show that transactions,realized volatility and PIN are significantly increased before hitting,and changes in these microstructural indicators have significantly positive relations with the price limits hit.In conclusion,this dissertation analyzes the micro mechanism behind the 2015 stock market crash by adopting the research method of market microstructure theory,and highlighting the key role of liquidity risk during the crash.The results provide empirical and theoretical evidences for the “liquidity spirals” effect of leveraged trading and the “liquidity spillovers” effect of price limits.The conclusion of this dissertation not only enriches the research content of market microstructure theory,but also provides some new understanding of the role of specific trading mechanism in asset price formation and market stability under crisis condition,and further provides direct and important reference for supervision layer to reasonably and effectively supervise leveraged trading,improve and perfect the price limits mechanism,strengthen the monitoring of market liquidity risk,and carry out crisis management.