The Impact Of Margin Purchase And Short Sales On The Volatility And Liquidity Of Chinese Stock Market

Since the launch of security margin trading, the issue of how it will influence the stock market has been discussed among theoretical and practical circles. The research tries to analyze the effect of security margin trading on the liquidity and volatility of stock market based on the data of margin trading from March 2010 to January 2013 so as to provide some suggestions to China’s security margin trading system. Currently, China’s security margin trading is developing fast with the number of underlying securities increasing. The system of margin trading in nature is a fundamental institutional transformation of China’s stock market, like the transformation of stock market, which shall be the trigger of next round of recovery. Therefore, the research is important in its academic value and practical significance, and the market efficiency will also benefit from the research.Specifically speaking, the paper starts from the introduction of the development of China’s security margin trading and the effect on the stock market, and then puts forwards the research angle. Based on the literature review of the effect of margin trading on stock market, the research lays the theoretical foundation of the empirical analysis. Then the research compares the development of security margin trading between China’s market and foreign market, and the research also makes a theoretical analysis of the effect of margin trading on the volatility and liquidity of stock market before empirical analysis. Next is empirical analysis part. This paper chooses two time periods, from Mar 2010 to Dec 2011, and from Dec 2011 to Jan 2013 as samples, to conduct comparison analysis, then uses the statistics methods, such as ADF test, VAR model, Granger test and Impulse response analysis to conduct the empirical analysis. The corresponding conclusion is:with the enlargement of underlying amounts of stocks in margin trading pool, the margin purchasing increasingly shows some influence on both market volatility and liquidity. It can stabilize stock market by decreasing its volatility and enhance market liquidity at the same time. Due to limited underlying stocks and the small trading volumes, short selling has no obvious impact on market volatility or liquidity. The last part is some suggestions and advice, which may be helpful for the upcoming enlargement of underlying securities and refinancing mechanism, that is, perfect and loose the supervisory mechanism at the same time, set up proper margin level mechanism.There are mainly two aspects of innovations in this paper. Firstly, the data and sample in this paper begin from the launch of security margin trading, until Jan.2013, which is a spread of researching period. There is also qualitative and quantitative analysis, which aims to make a research on the difference between two time periods. Secondly, when conducting empirical analysis on margin trading’s impact on market volatility, most existing studies choose GARCH model as a measurement to reflect the volatility. Since margin trading only exists and operates in china’s stock market for short period, the research sample is limited. This paper chooses the fluctuation of market index price to reflect market volatility, which is more relevant and feasible.