Research On Effects Of Margin Trading On Stock Market

Since Shanghai and Shenzhen Stock Exchange were established in1990, investmentproducts in China stock market have increased greatly, investment scale has expandedgradually, market system and operation mechanism have been improved. Nevertheless, thehigh market volatility is the practical question in China stock market, and harmful to itshealthy development. The lack of short selling mechanism is one of the important reasonsfor high market volatility. Margin trading business was widely practiced in mature markets,and it is thought to have positive effects on stabilizing stock price volatility, increasingstock market liquidity, and meeting the diversified needs of investors. So, it has long beenexpected to change the trading pattern of China ‘unilateral market’. Margin tradingbusiness in China has officially launched since March31,2010, it is a financial innovationafter the split share structure reform. Many literatures show that there is still much disputeon the actual market effects of margin trading. Margin trading is an innovation for Chinastock market, so its actual effect remains to be further tested. The purpose of this thesis isto give a reliable answer for the market effect of margin trading during the pilot period andthe normal period, to provide the empirical basis for further improvement of the margintrading system.Firstly we elaborate the basic theory of this thesis. Then, we establish an evaluationindicator system, including Anderson volatility and Amihud liquidity. Based on aPanel-Data regression model, a VAR model, Granger causality test and impulse responsefunction analysis, we empirically test and analyze effects of margin trading on theunderlying stocks and the stock market index. Furthermore, the thesis tries to find outreasons for these results, and puts forward relevant policy recommendations aboutimproving the margin trading system in favor of promoting a stable and healthydevelopment of the stock market.