| Margin trading is a system in which investors give collateral to the securities companies and borrow capital to long securities or borrow securities to short them. Margin trading includes the margin buying and security lending by financial institutions to securities companies and by securities companies to investors. In the global markets, margin trading has become a fundamental system which is widely implemented. Currently, most developed securities markets have implemented the margin trading system. Since March 31st,2010, China has officially launched their own margin trading system. The margin trading business in China has been growing exponentially since its launch. The margin trading balance reached 346.5 billion on Dec.31st,2013. However, the influence of margin trading on the stock market, especially on the market volatility, has been controversial in both academic and market fields.Theoretically, the margin trading system can either cause the volatility of the overall market and individual stocks to rise or fall. On one hand, the margin trading can cause a rise in volatility. First, the terms of margin trading forces the investors make market chasing transactions. Under the margin trading system, investors must meet the requirement of the maintenance margin ratio, which is the minimum amount of equity that must be maintained in a margin account. When the market rises and the short selling margin accounts fails to meet the margin maintenance ratio, the short sellers must buy the stocks back. When the market falls and the margin buying investors receive a margin call because of the failure to meet the margin requirement, the margin buyers must sell the stock in order to keep the maintenance margin. In short, the margin maintenance requirement increases selling in a declining market and buying in a rising market, which may in turn increase the volatility. Second, short selling is permitted under the margin trading system. When the market falls, the short sellers may chase the market and place more short orders. This causes the market to fall even more. However, on the other hand, short selling provides a tool for bearish investors. Thus the margin trading system can make the stock market less volatile by preventing a bubble from forming. If the market is overvalued and some investors think there is an irrational exuberance, they can short those stocks. When the stock prices are too far away from the intrinsic value, bearish investors can alleviate the market sentiment. In this situation when there is an option to short some stocks, investors can restrain some bubbles from getting bigger and help reduce the volatility during a bubble burst.This thesis examines the influence of the margin trading system on the stock market volatility in both theoretical and empirical way. The thesis uses the market and individual stocks trading data during 2012 to 2013 for the empirical study. This thesis first reviews the literature on both overseas and Chinese stock markets on the relationship between margin trading and stock volatility, and lists research methods and potential innovational points. Chapter 3 discusses the development of the margin trading system in China, the comparison among different trading pattern and how the margin trading system affects the market. Chapter 4 discusses the variable selection. For margin trading, this thesis uses the margin trading balance as the margin trading variable and innovatively incorporates the margin buying and short selling volume for a better depiction of the margin trading activities. The intraday volatility is used as the volatility measure.The empirical test of this thesis includes two parts. In the first part, the Granger causality test is used to test the relationship between the margin trading balance, margin buying trading volume, short selling trading volume and the overall market intraday volatility. The result shows there is no significant Granger causation relationship between the change of margin trading balance and market volatility. And there is mutual Granger causality relationship between margin buying trading volume and market volatility. It is also true for the short selling trading volume and the market volatility. The second part used the random effects panel regression model to study the relationship between the margin trading, short selling trading volume and volatility of 213 individual stocks respectively during 2012 and 2013. The result shows that the intraday volatility has a significant positive relationship with the margin trading and short selling volume. The short selling trading volume has greater influence on the stock volatility.Lastly this thesis provides three main suggestions for regulators. First, the cost for margin trading transaction should be reduced for the better functioning of the system. Second, the regulators should watch the abnormal situations of the underlying stocks. If the risk is too high for some stocks, regulators should remove them from the underlying pool to prevent further leveraged dumping. Third, the margin trading requirements should be executed according to the guidelines issued by stock exchanges, which can prevent risk accumulation. |
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