The Influence Of Margin Trading On Chinese Stock Market’s Volatility And Liquidity

Margin trading, as an important mechanism on the stock market, has played an irreplaceable role in the stock market’s functioning. On March 31,2010, China launched the official pilot project of margin trading, bidding farewell to the imbalances in the single market of the stock market situation. During 5 years’ running, the margin trading scale of Shanghai Stock Exchange and Shenzhen Stock Exchange are increasing constantly. Margin trading, as a new item of trading system, has an impact on stock market’s volatility and liquidity by way of influencing stock market’s supply and needs. However, issues like, whether this impact plays a promoting role or not, and the size of its role, have been hotly debated by scholars both at home and abroad.This paper starts with literature review both at home and abroad, clarifying research direction and ideas, and introduces concepts, elements, features, and functions of market trading, and compared main mode of market trading in the whole world as well as transaction pattern in China; secondly, it describes impact of margin trading on stock market’s volatility and liquidity in a theoretical way; then it analyses Shanghai Stock Exchange and Shenzhen Stock Exchange in an empirical way by using a series of research methods like GARCH model, VAR model, Granger causality test, pulse response and variance decomposition; finally, according to results of the empirical analysis and reality of Chinese stock market, it offers some suggestions from the perspectives in expanding margin trading scale, establishing perfect supporting system, increasing development efforts in refinancing and improving the margin supervision system.Conclusions of this study are as follows:(1)Through the empirical analysis on the influence of market trading on stock market’s volatility, margin increases the volatility of the stock market, which is not so high. Margin will increase the volatility of the stock market in a short term, but the long-term effect is small. There is bidirectional causality between margin trading and stock market volatility. Such margin mechanism shows that China is still in the initial stage. The introduction of margin trading is a very complex process for the stock market’s volatility. Meanwhile, changes of volatility are not only influenced by margin trading, but also depends on many factors, such as types of investor, market regulation and other relevant mechanisms of operation, which affect the final result.(2)Through the empirical analysis on the influence of market trading on stock market’s liquidity, it shows that the margin the liquidity of the stock market, which is not so strong. Financing transactions is the Granger cause of stock market liquidity, while margin trading is not. Impulse response and variance decomposition shows that the financing transactions and securities lending transactions enhance the liquidity of the stock market in the short term, which is also small. This may be due to short-time running and small-scale operations, and also due to uneven development of margin trading and small ratio of securities lending transactions; liquidity of stock market is a very complex process, which is influenced by many factors.