Security Margin Trading And The Quality Of Stock Markets ——Perspectives Of Liquidity And Volatility

The quality of stock markets is important to the development of real economy.Political,economic,cultural,social and international factors are all the key factors affecting the quality of stock market,while institutional factor is the fundamental factor.Chinese stock markets had experienced eight bullish markets and seven bearish markets from the establishment in 1990 to August 2009.The market was very typically bullish from June 6,2005 to October 16,2007,during which the Shanghai Composite Index had risen five times from 998.23 to 6124.04.Then followed by a typical stock disaster,the Shanghai Composite Index fell down to 1664.93 on October 28,2008,which was down 72.81% during just one year.It was a staggering drop.Why did Chinese stock market boom and drop so sharply and fluctuates so hugely? One big reason is that Chinese markets were lack of short selling mechanism.On March 31,2010,with the main purpose of "improving the liquidity and reducing the volatility",China Securities Regulatory Commission(CSRC)launched security margin trading business both in Shanghai and Shenzhen Stock Exchange.Financing buying and short selling changed the original trading payment mechanism and microstructure of China's stock market when they were allowed in Shanghai and Shenzhen Stock Exchange at the same time as a kind of security credit trading mechanism.It must affect the formation mechanism of stocks' market prices and the quality of stock markets in China.By November 7,2019,Shanghai and Shenzhen Stock Exchange had expanded the scope of the underlying stocks of margin trading for six times respectively,and the number of the underlying stocks has reached 1600 from 90,the balance of margin trading also had reached a trillion yuan.Since the speed development of margin trading business in Chinese stock markets was so rapid,then,what impact would financing buying and short selling have on the quality of the stock markets? Did they really "improve the liquidity and reduce the volatility" as the government and public expected?Based on the market microstructure theory and the sample data from March 31,2010 to November 7,2019,this paper uses theory analysis method and a variety of empirical methods,such as panel regression model,ARMA-GARCH family model,DID model and SVAR model and so on,to study systematically and comprehensively the impact of margin trading on the liquidity and volatility of underlying stocks and markets.It obtains the findings that the margin trading not only improves the liquidity of individual underlying stocks and the A-share markets,but also reduces the volatility of them,and thus improves the quality of the Chinese stock markets.The main conclusions in this paper are as follows:Firstly,the simultaneous introduction of financing buying and short selling improves the liquidity of the underlying stocks.With the deepening and development of margin trading business,the impacts of margin trading on the liquidity of the underlying stocks are becoming stronger.The short-term momentum trading strategy of margin traders improves the liquidity by reducing the price impact of underlying stocks.The exit of institutional and the entry of medium and large individual investors make the liquidity of the underlying stock portfolios with higher turnover,lower market value and lower idiosyncratic volatility increase more obviously.Secondly,financing buying and short selling provide liquidity for Shanghai and Shenzhen A-share markets,and the positive influence on the liquidity of Shanghai A-share market is greater than that of Shenzhen A-share market.The positive influence of financing buying on market liquidity is greater than that of short selling,it's because that financing buying volume is much larger than short selling volume.The influences of financing buying and short selling on market liquidity don't increase with the increasing of the scope of the underlying stocks,but relate to margin trading volume.The liquidity provided in the bearish market is greater than that in the bullish market.It's probable that the supply of stocks is bigger than demand in the bullish market,and financing buying increases liquidity for the market by providing the demand of underlying stocks.Thirdly,the simultaneous introduction of financing buying and short selling reduces the volatility of the underlying stocks,and the volatility of the underlying stock group with higher financial leverage is reduced more than that of stock group with lower financial leverage.After the margin trading business was launched,the financial leverages of the underlying companies and the speculative trading of the underlying stocks are reduced and the leverages of underlying companies with higher leverage are reduced more than those with lower leverage.The reduction of the financial leverage of the underlying companies and the speculative trading of the underlying stocks are the important reasons for the decrease of the volatility of the underlying stocks.Finally,financing buying and short selling reduce the volatility of Shanghai and Shenzhen A-share markets,and the negative influence of financing buying is greater than that of short selling on market volatility.Contrary to liquidity,the impact of both financing buying and short selling on the volatility of Shenzhen A-share market is greater than that of Shanghai A-share market.When the number of underlying stocks is too low,the negative influences of financing buying and short selling on market volatility is not significant,and they don't decrease with the increasing of the scope of underlying stocks.They are relate to the margin trading volume.In the bullish market,huge-trading amount of financing buying will increase the market volatility.In the bearish market,short selling will not increase,but reduce the market volatility.On the one hand,the conclusions of this paper are helpful to understand and master the formation mechanism of stocks' market prices under the new microstructure of Chinese stock markets.On the other hand,they are helpful for investors to correctly understand the margin trading and regulators to formulate a scientific and reasonable regulatory policy,so as to further develop and improve the margin trading system and improve the quality and operational efficiency of Chinese stock markets.