Abstract
No consensus has been reached on the impact of margin trading, including margin purchase and short sale, on market volatility. Margin purchase and short sale provide investors opportunities to be involved in financial market, so that this mechanism can increase market liquidity and efficiency. However, opponents argue that short sale may disrupt market. The data selected are SSE 50 index (Shanghai Security Exchange 50 Index) whose constituent shares are the most liquid and representative stocks in Shanghai Security. This paper analyzes SSE 50 Index covering a time period from Jan 4th, 2007 to October 16th, 2015. Moreover, time period is divided into three samples where market booms, corrects and drops. What’s more, this paper carries out Granger Causality Test, Impulse Response Analysis and Variance Decomposition Analysis, based on VAR model. To conclude, margin purchase and short sale ease volatility, but it depends when market is in different stage.
Highlights
Margin trading is defined as margin purchase and short sale
We can make a conclusion that margin purchase does cause market volatility and market volatility influences short sale activity at the 10% level
This paper studies the impact of margin trading, which includes margin purchase and short sale, on market volatility, based on Shanghai Stock Exchange (SSE) 50 index in Chinese stock market
Summary
Margin trading is defined as margin purchase and short sale. That is, borrowing money from security companies with a certain percentage of cash deposit, leveraged investment, or short selling stocks which are believed to be overpriced. Miller (1977) argues that short sale constraints could cause price booming without limit It is not until March 31st, 2010 that margin trading has been permitted in China and stocks in the list of margin purchase and short sale is renewing. Influenced by the 2008 financial crisis, Chinese stock market experienced a long-time dull, and launched a rally in about July 2014. It peaked at its recent highest point as 5178.19 on June 15th, 2015 and dropped during the “616” event and the “818” event. The paper employs margin trading data of SSE 50 index, which includes the most liquid and biggest-cap no more than fifty stocks in Shanghai Stock Exchange. To study the relationship between margin trading and market volatility, this paper constructs VAR model, and Granger Causality Test, Impulse Response Analysis and Variance Decomposition Analysis are carried out, based on VAR model
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