The Impact Of Margin Trading On Liquidity And Volatility Of Security Market

The A share market was at down concussion situation and continued to decline after ashort term increases in2011, while the deal size of margin trading continued to grow.From Mar2010, the beginning of the trial work of margin trading transaction for securitiescompanies in China stock market, to Aug2011, the margin trading volume has amountedto33billion, however, which is still smaller in scale in contrast to the circulation marketvalue of90underlying securities, that is9.5trillion. Margin trading is an importantmeasure of stock market, and it is necessary to study the impact of margin trading on stockmarket, which has been a hot issue and debate in the theoretic and practical field. Thispaper discusses the impact of margin trading on the stock market, mainly from the view ofboth market and specific stocks’ liquidity and fluctuation. The research has importantacademic value and practical significance, especially at the crucial moment that margintrading will turn to routine and refinancing mechanisms will come true. From theimplementation of margin trading until now, the volume of short selling in the total margintrading was in the proportion of relatively low, while the short buying stabilized at ahigher share of between94%and100%. So this paper still focused on the impact effect ofshort buying, which can be better explain the effect from the angles of market liquidityand fluctuation, and use event study on the parametric or nonparametric tests of individualstock inclusion and exclusion of new margin trading rage.This paper firstly outlined articles related to effects of margin trading on securitiesmarkets, and analyzed the influence mechanisms of margin trading on the markets.However, there were not too many researches in the view of China’ stock market. Andthen it selected the China’s stock market from Mar2010–Aug2011,347trading sessionsas an example. This paper made empirical analysis from the angles of both stock marketand specific stocks, in order to analyze the effect of margin trading and to prove whethermargin trading could stabilize the stock market and boost the liquidity. What this articlehas achieved and main contributions are as following:Margin trading mechanism has a long-term cointegration relationship with the marketvolatility, but not with the market liquidity. Margin trading and short buying are the Granger causal element of market liquidity and volatility, but market liquidity andvolatility are not the Granger causal element of margin trading and short buying. We drawthe conclusion that, in the short term, margin trading could stabilize the volatility andenhance stock liquidity of both the market and the single stock.