The Empirical Study Of Margin Trading Business Price Discovery Function

Margin trading is an activity that investors borrow money or listed securities from qualified securities companies to make transaction, and that securities companies charge investors for security deposit. Margin trading has been running for more than 400 years. Nowadays, securities markets in many countries have introduced margin trading, which plays an important role in stabilizing the market, enhancing market liquidity and promoting price discovery function.At the beginning, China’s securities market did not introduce margin trading system. Until March 31,2010, China formally brought in the system. In the pilot phase of margin trading, the underlying stocks were only 90 and the scale of margin transactions was small. On November 25,2011, the margin trading was transferred to regular trading operation, and the scope of the underlying securities began to expand. After four times of expansion in underlying stocks, margin trading in China now has 900 trading stocks, contributing to the leap-forward development of the margin trading. In the year of 2014-2015, margin trading brought the first Bull with a lever in China’s securities market. But as the market surged, the market began a cliff fell:a lot of stocks fell to the limit in many trading days. After regulators in China make "rescue" measures, the market temporarily stopped falling and rebounded, leading to stocks rise to limit. Facing the market rose and fell sharply, people questioned:in China’s securities market, can the margin trading perform its fuctions? In the paper, I will use data in China’s securities market to address the price discovery function of margin trading.In this paper, China’s securities market is divided into Shanghai Stock Exchange, Shenzhen stock market boards, Junior and Gem. I use Event Study to research the effect of margin trading to the stock overvalued and stock’s price informativeness.In the part of margin trading and stock overvalued, the research is based on Miller （1977）’s "stock overvalued hypothesis":In the market with strong short-sell constraints, stock prices are overvalued. Stocks overvalued level can be reflected from the excess returns of the stock. If allowing the margin trading, stocks will have significantly negative excess returns, showing that margin trading can reduce the stock overvalued level. On the contrary, it indicates that margin trading cannot reduce the level of shares overvalued.So this paper marks September 22,2014, as the event day, with [-150,-10] as a prior estimate window, and use the fourth expansion added 81 of the underlying stock, calculate SSE, SZSE motherboard, Junior and GEM stocks’ excess return, cumulative abnormal return in the event. From the empirical results, it can be seen that there were no significant negative level of excess returns in China’s Shanghai Stock Exchange, Shenzhen stock market Board, junior, and samples of the GEM stocks. This shows that the introduction of margin trading does not reduce the level of shares overvalued.In the part of margin trading and stock’s price informativeness, the research chooses β and R² calculated by market model as indicators.β can reflect the correlation in stock returns and market returns, then show the stock’s sensitivity to market information. R² is firstly proposed by Roll（1988）. If β and R² become smaller after introducing margin trading, it shows that margin trading can make the stock’s price contain more characteristic information, implying that the stock’s price informativeness has been raised. So this paper selects β、the derivative index β⁺、β^- and R²、R²⁺、R^2- as indicators, using event study and marking September 22,2014 as event day, to analyze β、β⁺、β^- and R²、R²⁺、R^2- in prior window [-150,-30] and after window [30,150]. From the empirical results, it can be seen that margin trading raises stocks’ price informativeness in SSE and SZSE board, while reducing the stocks’ price informativeness in Junior and GEM board.Based on the analysis of two parts, this paper concludes that:from a general point of view, margin trading in China’s securities market does not play a significant role in price discovery function. The conclusion is mainly related to the asymmetric information of securities markets, investor irrationality and the imbalanced development of margin trading. So, in the end, this paper puts forward suggestions to accelerate the development of margin trading.