Margin Purchases Research Articles

Margin trading system as stock market stabiliser: evidence based on CSI 300 index

ABSTRACT The daily transaction data of Shanghai and Shenzhen 300 Index are taken as sample data. The GARCH model is used to examine the effect of the margin trading system on the stock market volatility of China. The VAR model is used to further test the separate effects of margin purchase system and short sale system upon the role of stock market stabiliser. Results show that margin trading system can restrain stock market volatility and stabilise the market, but the effect of restraining the stock market volatility is limited and has stage characteristics. In particular, the margin purchase system has a greater short-term restraining effect on stock market volatility than the short sale system, whereas the short sale system can stabilise the market more permanently than the margin purchase system. Through international comparisons, we suggest that the margin trading system should be improved to enhance its role as a stock market stabiliser in China.

Margin purchases, short sales and stock return volatility in China: Evidence from the COVID-19 outbreak

In this paper, we investigate the effects of margin purchases and short sales on the return volatility in the Chinese stock market during the COVID-19 outbreak. We present two main findings. First, we show that stocks with higher level of margin-trading activity exhibit higher return volatility. The COVID-19 outbreak amplifies the destabilizing effects of margin-trading activity. Second, no evidence shows that short selling destabilizes the stock market in general. However, we observe that intensified short-selling activity is associated with lower return volatility when infection risk is high during the COVID-19 crisis.

Testing market regulations in experimental asset markets – The case of margin purchases

Margin requirements regulate the risks of leveraged positions in financial markets. Violated margin requirements trigger margin calls leading to automated liquidation of open margin positions. Due to a lack of active margin regulation, however, empirical studies are not able to capture the effect of margin regulation on asset market performance. Instead, we conduct an experimental finance study to understand how margin regulations, and in particular margin purchases, influence market performance. Our experimental results indicate that permitting margin purchases inflates market prices; in fact, active margin trading positively correlates with market prices. In a robustness check, we also permit short sales which curb though not eliminate the effects from margin purchases.

Optimal purchase and selling strategy for wholesaler of produce: sorted or unsorted selling?

Produce (e.g. fruit and vegetable) varies in quality when it is picked from plants. Then a produce wholesaler has two sales strategies: (1) unsorted selling (US), i.e. selling the produce to the market at one price and (2) sorted selling (SS), i.e. pre-sorting the produce into different grades by quality and selling them at different prices. When the SS strategy is adopted, the demands of the different grades are uncertain and substitutable. In this paper, we study the joint optimal purchase and sales strategy for selling mixed quality produce to customers with heterogeneous quality preferences. We first derive the optimal purchase policies under the two strategies and then identify the conditions under which the SS or US strategy is optimal. We show that the optimal sales strategy is determined by the marginal purchase and sorting cost and the fixed investment cost, the overall quality level of the produce, and the substitution rate for the high-quality and low-quality produce. This finding differs from the conventional wisdom that the SS strategy is optimal in the produce retail business. Finally, we conduct numerical studies based on real-world data to generate managerial insights from the analytical findings.

Arbitrage Opportunities: Anatomy and Remediation

We introduce an experimental design where arbitrage opportunities emerge reliably and repeatedly. We observe significantly higher sell-side than buy-side arbitrage opportunities. We study ways to mitigate them. Relaxing margin requirements, shortsale restrictions, or both have neither statistically nor economically significant effects. Increasing competition (more participants, each with small stakes), and more impactful, participants’ stakes (few wealthy participants each with large exposures), generate large reductions in arbitrage opportunities. Hence, we advocate increased competition for small markets, and allowance for large stakes in large markets, rather than relaxation of rules on margin purchases or shortsales.

Spillovers of price efficiency and informed trading from short sales to margin purchases in absence of uptick rule

We examine the informativeness of short selling on margin buying activities around corporate earnings announcements before and after the removing of uptick rules for some stocks in Taiwan. Whereas most previous studies have studied the effect of short selling on the shorted stocks themselves, it is not clear if there is an information spillover effect from informed short sellers to uninformed margin traders as it pertains to the impact of removing short selling restrictions. Our findings suggest that: (1) Both short-selling and margin-buying activities are effective in improving the price efficiency, but the effect of short-selling on price efficiency is stronger than that of margin-buying; (2) For the stocks without uptick rule, short-selling has significant information spillover effects on margin-buying around earnings announcements especially for firms with negative earnings surprises; and (3) Using stock price synchronicity, we show that the removal of the uptick rule significantly improves stock price informativeness and favors more informed trading.

Short Sale, Margin Purchase, and Stock Price Crash Risk

We investigate the impact of short-sale and margin-purchase on stock price crash risk in the Chinese markets. China lifted bans on short-sale and margin-purchase for stocks on an expanding designated list since March 2010. Results of difference in different tests reveal that the removal of bans on short-sale and margin-purchase is followed by a reduction in stock price crash risk over the subsequent six months. Utilizing firm-level daily short-sale and margin-purchase turnover data, we find that short sales reduce future stock price crash risk whereas margin purchases add to the risk.

The Impact of Margin Trading on Volatility of Stock Market: Evidence from SSE 50 Index

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.

An Analysis of Short Selling, Margin Purchasing, and Bid-ask Spreads around Illegal Insider Trading: Evidence from Taiwan

This study examines margin trading activities and bid-ask spreads around companyspecific news announcements, in which insiders were convicted of illegal trading on nonpublic information in the Taiwan stock market. We find significant excess short sales (margin purchases) before bad (good) news announcements. Results indicate that abnormal short selling (margin trading) is significantly and negatively (positively) related to postannouncement stock returns. Furthermore, our results show that short selling and margin purchasing increase pre-announcement bid-ask spreads and decrease market liquidity.

The introduction of the exemption system for foreign profits and its effects on international acquisitions – the UK and Japan regaining international tax competitiveness?

Purpose – Both, the UK and Japan abolished the tax credit system for foreign source dividends in 2009 in favour of the exemption system. With the move towards a dividend exemption system the governments intended to enhance the international tax competitiveness of their countries. The purpose of this paper is to evaluate the implications of substituting the credit system for the exemption system in the UK and Japan on cross-border transaction prices when competing for international acquisitions. Design/methodology/approach – The paper uses an economic model under certainty to analyse the changes in cross-border marginal purchase and seller prices as a result of the introduction of the newly introduced dividend exemption system. Findings – Shifting to an exemption system has ambiguous effects on the ability to compete for foreign acquisitions: investors from both countries are able to pay higher prices in the course of acquisitions, but while investors from the UK become more competitive, the relative competitive position for Japanese investors hardly changes and remains relatively constrained, independent of the form of double taxation relief. Thus the author verifies that the international tax regime is not the only determinant influencing the competitive position, ranking second to, e.g., the interaction with international tax rate differentials. Originality/value – The international tax reforms in UK and Japan in 2009 offer a unique opportunity to study the impact of international tax policy on the international tax competitiveness of multinational firms in the course of foreign acquisitions. Evidence from this paper is not exclusively applicable to the UK and Japan setting. The observed effects shed new light on the intensified debate in the USA of changing the international tax system by analysing the impact on the bidding situation in international acquisitions in a real-world transition scenario.

Short sales, margin purchases and bid–ask spreads

This study examines intraday patterns of short sales, margin purchases, adverse selection, and bid–ask spreads in the order-driven market of the Taiwan Stock Exchange (TWSE). We find that both short sales and margin purchases exhibit a U-shaped intraday pattern in the TWSE. We further show that short sales and margin purchases have a significantly positive relationship with adverse selection and bid–ask spreads. We provide evidence that the U-shaped pattern of bid–ask spreads can be explained by short selling and margin trading activities.

Investment Constraints and Delegated Portfolio Management

This paper examines the optimal use of investment constraints in delegated portfolio management. We show that investment constraints, which limit managers’ uses of margin purchase and short-sales, can benefit investors by enhancing managers’ incentives to acquire long-term investment information – information that identifies significant asset mispricing, which may take a long time to be corrected. Our analysis helps explain why mutual fund managers are typically subject to much tighter investment constraints and receive less high-powered compensation than do hedge fund managers.

Margin Purchases and Short Sales in Emerging Markets: Their Rationales and Design Variables

Emerging equity markets generally need an exogenous liquidity supply in order to accelerate their development. Margin trading (margin purchases and short sales) represents an important vehicle which promotes exogenous supply of market liquidity. Adequately regulated margin trading can induce relatively powerful and short liquidity recoveries after market corrections or crashes. Vital to margin trading is a stock borrowing and lending system. Margin purchase and short sale facilities require regulators, financial intermediaries, and investors to have heightened risk management skills in addition to robust market infrastructure. Despite their standardized features, the actual design and operation of the market infrastructure necessary for margin trading should be country or market specific. The characteristics and composition of factors affecting the design and operation are dynamic and the key components of this important market infrastructure must be flexible so that they can change over time.

Better by Design: An Introduction to Planning and Designing a New Library Building

Better by Design: An Introduction to Planning and Designing a New Library Building

Auswirkungen der deutschen Unternehmensteuerreform 2008 und der österreichischen Gruppenbesteuerung auf den grenzüberschreitenden Unternehmenserwerb

Anhand eines einfachen Modells unter Sicherheit zur Bewertung von Kapitalgesellschaften wird gezeigt, wie sich die Unternehmensteuerreform 2008 in Deutschland und die Einfuhrung der Gruppenbesteuerung in Osterreich in 2005 auf die Kaufer- und Verkaufergrenzpreise bei grenzuberschreitendem Erwerb von Kapitalgesellschaften auswirken. Die Ergebnisse zeigen, dass trotz der Einfuhrung der Gruppenbesteuerung ein osterreichischer Investor keinen hoheren Grenzpreis fur eine osterreichische Kapitalgesellschaft zahlen kann als sein deutscher Konkurrent. Ein deutscher Investor kann sowohl auf dem osterreichischen als auch auf dem deutschen Markt fur Unternehmenstransaktionen einen hoheren Preis zahlen. Dieses Verhaltnis kehrt sich durch die Unternehmensteuerreform 2008 in Deutschland um. Nun kann der osterreichische Investor in Osterreich einen hoheren Preis zahlen; beim Erwerb einer deutschen Kapitalgesellschaft hangt die Vorteilhaftigkeit von dem Ausschuttungsverhalten ab. Durch die Einfuhrung der Abgeltungsteuer steigt die Renditeforderung des deutschen Investors und seine Zahlungsbereitschaft sinkt. So wirkt sich die Unternehmensteuerreform 2008 trotz eines sinkenden Korperschaftsteuersatzes stark negativ auf die Wettbewerbsposition eines deutschen Erwerbers einer Kapitalgesellschaft aus.

Effects of German Reform of the Company Taxation 2008 and the Austrian Group Taxation on the Transnational Enterprise Acquisition (Auswirkungen der deutschen Unternehmensteuerreform 2008 und der oesterreichischen Gruppenbesteuerung auf den grenzueberschreitenden Unternehmenserwerb)

Using a simple model under certainty we show the implications of the new group relief system in Austria effective from 2005 and the reform act of business taxation 2008 in Germany on cross border marginal purchase prices and marginal seller prices concerning incorporations. The results show that the new group relief in Austria does not imply a higher marginal purchase price for a subsidiary located in Austria by an Austrian investor in comparison to his German competitor. If the German reform act of business taxation 2008 is not taken into account a German investor is able to pay higher marginal prices at the Austrian and German transaction market for companies. Considering the German tax reform act the situation changes. Now the Austrian investor is able to pay higher marginal prices for subsidiaries located in Germany and Austria.

Heterogeneous Investors and their Changing Demand and Supply Schedules for Individual Common Stocks

Using 550 million limit orders submitted in the Korea Stock Exchange, we estimate demand and supply elasticities of heterogeneous investor types and their changes around the Asian financial crisis. We find that domestic individuals have substantially more inelastic demand and supply curves than domestic institutions and foreign investors. The crisis permanently reduced price elasticities of domestic individuals by 50% but had no effect on those of foreign investors. Institutional changes restricting margin purchases, implemented after the crisis, seem particularly important in explaining the dramatic drop. Information heterogeneity, availability of close substitutes and arbitrage risk also explain time-series variations in elasticities.

LONG-SHORT STRATEGIES: AN EXTENSION

This note supplements the paper by Charpin and Lacaze [1], which studied the efficient frontier of long-short portfolios taking regulations into account. The long-short portfolios were constructed using purchases on margin and short sales. We now introduce the possibility of making cash purchases (in addition to margin purchases) which can then be used as collateral for short selling. We first present the model, which encompasses our previous one. We then describe the potential gain from this new model, showing that it is likely to be negligible. A numerical resolution confirms this point.

Bubbles in Experimental Asset Markets: Irrational Exuberance No More

Abstract: The robustness of bubbles and crashes in markets for finitely lived assets is perplexing. This paper reports the results of experimental asset markets in which participants trade two assets. In some markets, price bubbles form. In these markets, traders will pay even higher prices for the asset with lottery characteristics, i.e., a claim on a large, unlikely payoff. However, institutional design has a significant impact on deviations in prices from fundamental values, particularly for an asset with lottery characteristics. Price run-ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell. JEL classification: C92, G14 Key words: bubbles, asset markets, laboratory experiments, rational expectations ********** One of the most striking results from experimental asset markets is the tendency of asset prices to bubble above fundamental value and subsequently crash. Explaining the price pattern is a challenge. Yet extreme price movements, at odds with any reasonable economic explanation, are documented throughout history. Examples include the Dutch tulip mania (1634-1637), the Mississippi bubble (1719-1720), and the stock market boom and crash of the 1920s (see e.g., Kindelberger (1989), Garber (1990), White (1990)). More recently, in a speech made on December 5, 1996, Federal Reserve Chairman Alan Greenspan expressed concern that stock prices are inflated by irrational exuberance. The current debate over rational valuation centers largely on internet-related companies. Though downward price adjustments have been observed of late, stock prices for many of these so-called dot-coms increased at incredible rates over the last decade despite mounting accounting losses. Price to earnings multiples for some dot-coms (or price to revenues when earnings are negative) were as high as several hundred to one, something unheard of just ten years ago. Chairman Greenspan speculates that the observed price behavior might reflect a lottery effect. Market participants are willing to pay a premium for some stocks because, though the chance is small, a very significant payoff is possible. (1) This paper reports the results of experimental asset markets designed to examine whether asset prices reflect a lottery premium. The results indicate that traders will pay a premium for a claim on a large payoff, even if the payoff is unlikely. In addition, this study re-examines whether institutional design impacts upward deviations in prices from fundamental values. Unlike previous research that documents the robustness of bubbles formation, price run-ups and crashes are not observed when traders are not permitted to finance purchases with borrowed funds but are allowed to short sell the assets. The remainder of this paper is organized as follows. Section I provides background and motivation for the study. Section II describes the experimental procedures and design. Section III reports the results. Section IV contains a discussion of the results and concluding remarks. I. Regularities, Institutional Features, and New Questions Smith, Suchanek, and Williams (1988) first reported bubbles in experimental asset markets. Typically in bubbles markets, subjects trade an asset over a finite horizon. The asset has a common dividend, determined at period end based on a known, stationary probability distribution. Thus, fundamental value, assuming risk neutrality, is easily computed as the number of trading periods remaining multiplied by the expected dividend per period. In this setting trading yields large upward deviations in prices from fundamental value followed by crashes back to the asset's risk neutral value. The finding has been replicated by Porter and Smith (1995), Ackert and Church (2000), and Lei, Noussair, and Plott (2001), among others. King, Smith, Williams, and Van Boening (1993) investigate whether bubbles are moderated by several treatment variables including the ability to short sell, margin purchases, the presence of brokerage fees, equal endowments across traders, a subset of informed traders, limit price change rules, design experience, and experience in the business world. …

SERMAYE PİYASALARI ve KALKINMAKTA OLAN ÜLKE FİRMALARI

Over the past few years, access to the international financial markets has becorne easier for rnany developing countries, which have enjoyed a surge in Capital in flows. At times, because of the small size of Capital markets in developing countries relative to the size of Capital flows, the latter have caused substantial movements in domestic asset princes. Consequently, some countries have adopted or strengthened measures to reduce volatility in asset markets - for example, restrictions on margin purchases of securities taxes and direct government intervention in equity market.