The Impact Of Margin On China 's Stock Market

It has experienced rapid development in the last three years since the formal pilot implementation of margin trading mechanisms in China. With the expansion of the scope of underlying stocks, the increase of trading size and the improvement of trading mechanisms, margin trading has increasingly become a key focus of investors, regulators and academia. However, the influence of margin trading, especially for short sales, to the capital market, has been a prevalent issue of dispute for practitioners and academics both at home and abroad. Therefore, this paper expects to find out the impact of margin trading on China’s stock market through in-depth and systematic studies.On the basis of existing theoretical analysis and literature review, we firstly investigate the price discrovery function through using event study to examine the changes of stocks’price before and after the introduction of margin trading. We find that margin trading did not exert that function at the pilot implementation phase, due to the smaller range of underlying securities and the lower trading size. But with the expansion and rapid development, margin trading did have significantly changed the price of new added stocks to the underlying security list. But the direction of the changes is associated with the strength of margin purchase and short sales. The significant increase of stocks’price after margin trading is accompanied by stronger margin purchase while the significant decrease of stocks’price after margin trading is accompanied by stronger short sales.Secondly, to conduct research on the impact of margin trading to China’s stock market, we adopt VAR model and ARDL model to investigate the full sample from both aspects of margin purchase and short sales. The results show that margin purchase can significantly improve market liquidity and reduce market volatility, and short sales can also significantly decrease the volatility, but it has a negative effect on market liquidity at the10%significance level.In addition, this paper make further study on the impact under different market conditions, thereby, we can see whether there’s any difference for the impact in a bull or a bear market. We find that margin trading can improve market liquidity and reduce market volatility both in the bull and the bear market, but the influence is not so significant in the bear market and it is weaker than the effect in the bull market. Regarding to short sales, it can impove the liquidity and reduce the volatility significantly in the bull market, while in the bear market, it has a negative effect on market liquidity though not significant and it can not reduce market volatility significantly.Finally, based on the above empirical studies and conclusions, we give some concise recommendations about the margin trading mechanisms in China.