Do The Margin Trading And Short Selling Stabilize The Market?

The paper studies the impacts of the Margin Trading and Short Selling on China's Stock Market.The margin trading and shorting selling are the combination of “negative feedback” and “positive feedback”.Negative feedback promotes the stock price to its fair value and reduces the fluctuation while the positive feedback increases volatility effectively.In this paper,we choose the Shanghai Composite Index and the underlying stocks at the Shanghai Stock Exchange during Dec,2011 to Aug,2015 as our samples.The study of the margin trading and short selling's influences on the Shanghai Composite Index,which we choose VAR model and DCC-GARCH model.To study the influences on the underlying stocks,we choose the Event Study and Multiple Linear Regression Model.From our study,we get four siginificant results.Firstly,the correlation of margin trading is much larger than the shorting selling with stocks volatility,indicating marging trading plays a leading role.This is mainly related to the unbalanced development of margin trading business,the shorting balance is less than 1% of the financing balance.Secondly,the effect of margin trading is related with the market situation.When the market is in severe turbulence during July 2014 to Aug 2015,the correlation coefficients are big and significant,which indicates that margin trading increases volatility effectively.When the market is in stable stage,the correlation coefficients are small;indictaing the margin trading cannot restrain the volatility effectively.Thirdly,the effect of margin trading is also related with margin trading's activeness.Only when the activeness of margin trading reaches a level,the impacts of margin trading on the fluctuation of underlying stocks are statistically significant.Generally,for a target stock,the more active it is in the margin trading activity,the more effect on volatility.Lastly,the effect of margin trading is also associated with the underlying stocks' valuation.In comparison with financing to buy under-valued stocks and financing to buy high-valued stocks,the former's volatility is less.