The Relationship Of Margin Trading Implementation And Market Performance In China

AbstractAfter years of preparation, Chinese securities market margin trading was finally launched in March of2010. Though it is widely agreed that margin trading is significant to financial market, however, in practice it is always difficult to draw out a common conclusion on the specific effects. On the other hand, there have been even fewerresearches on the effects the market has on margin trading, in other words, a mutual "Cause and Effect Relationship".Now with a history of2years of margin trading in China, it is right the time to evaluate this relationship, analyze the role and contribution of margin trading, thus provide further instructions.Through selecting component stocks of SSE50(Shanghai Stock Exchange50index) and SZSE40(Shenzhen Stock Exchange40index), focusing on the period from Mar.312010to Sep.22011, which sums up to350trading days with daily data, using Co-integration Test, Granger "Cause and Effect" Test, Impulse Response Analysis and Variance Decomposition as empirical study, this paper is trying to discuss about the "Cause and Effect Relationship" between margin trading (long/short trading) and underlying stocks’market performance (liquidity/volatility). We come up with3main conclusions:1. In China, margin trading mainly refers to volatility.There is a mutual "Cause and Effect Relationship" between both long purchases, volatility and short selling&volatility.On the contrary, margin trading has less to do with liquidity. There is only unidirectional effect of liquidity on long purchase, but not vice versa. Furthermore, there is no any Granger relationship between short selling and liquidity.2. Specifically, the relationship between margin trading and volatility is negative, while that between margin trading and liquidity is positive. In other words, margin trading has the effect of restraining market volatility, at the same time it is also restrained by market volatility. On the contrary, margin trading and market liquidity have the effect of encouraging each other. But again, as proved in Granger Test, only the volatility restraining effect is statistically significant.3. Though mutually influenced, both long purchase and short selling appear to be influencedmore than they could influence market performance. This means margin trading have a relatively lessrestraining impact on market performance. In other words, although margin trading could restrain market volatility, the effect is relatively weak and not persistent.Based on the conclusions above, we propose some suggestions about the future implementation of margin trading in China.