Empirical Research On The Impact Of Margin Trading On Liquidity And Volatility Of Shanghai Security Market

The Margin Purchase and Short sale has been in China’s stock market for almost ayear and the business has developed stationary, as the daily average margin tradingbalance has risen to180million. Accompanied with approaching of refinancingmechanism, the margin trading business will experience the process of quantitativechange to qualitative change, at the mean time; will have a tremendous impact on thesecurity market. Concerning to the volatility clustering, persistence and asymmetriceffects of China’s stock market, the introduction effect of margin trading mechanism toChina’s stock market in the short term period has an important practical significance.On the basis of existing research, using data from Shanghai Security market, thispaper utilize the empirical research to study the relationship of margin trading and theentire market, as well as the impact of margin trading on single stock. The results showthat the margin trading mechanism and the volatility of Shanghai Security Market existsa long-term cointegration relationship, while there isn’t such relationship between themargin trading and the liquidity. The Granger causality test shows that the margin tradinghas a causal effect on market liquidity and volatility. By using the event study, theparametric and nonparametric tests on the inclusion and exclusion of new margin tradingstock range shows that, margin trading mechanism can stabilizing the volatility ofindividual stocks and can enhance stock liquidity.The impact of margin trading on the market is not a single linear relationship,whether increasing or stabilize market volatility and enhance or reduce market liquidityis also subject to other market factors. With the existence of margin leverage, margintrading stable markets investment risk, while increased investment income. This papermakes further constructive comments on the margin trading on China’s security market.