Abstract
Abstract This paper investigates how variations in stock-level leverage lead to dynamic intraday trading behavior and illiquidity transmission across different stocks by utilizing a unique, precise, stock-level margin trading dataset. We document that leveraged investors’ need to meet margin call requirements and liquidity demands due to prior market drops results in subsequent selloffs in otherwise stable stocks, particularly in trading sessions in which there is little new information. This effect exists both within and across different industries and is stronger for stocks with less information asymmetry, better liquidity, higher past stock performance, and even during trading suspension. We also find strong evidence on the volatility spillover induced by leverage. Taken together, such findings suggest that our results are driven by illiquidity contagion instead of information spillover. Our study contributes to the research on asset fire sales, margin trading, and funding liquidity during the intraday deleveraging process in financial market turmoil.
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