The Effect Of Margin Trading On Stock Pricing Efficiency

Margin trading has become an important part of Chinese stock market.It has changed the original market operation mechanism and affected the investment mode,which inevitably has an impact on the stock market.Asset pricing efficiency is one of the key index of the efficiency and quality of capital market.With the development of margin trading,its influence on the stock pricing efficiency has received more attention.Therefore,we take the pricing efficiency,the key index of the stock market,as the starting point to study.We explore the impact of margin trading on the efficiency of stock pricing from the perspective of stock crash and market co-movement based on Chinese A-share markets.We want to answer the following questions: how margin trading affect pricing efficiency? What the influence mechanism of margin trading and short selling?Since the margin trading started in March 2010,it has experienced six expansions,which provides an experimental environment for the difference-in-difference(DID)model.Therefore,we use the DID model to study whether the margin trading affects pricing efficiency.Then,for the affect mechanism of individual stocks,referring to Lv and Wu(2019),we propose three hypotheses on the possible impact mechanism of margin trading: the liquidity mechanism,the arbitrage risk mechanism and the fire sale mechanism.The liquidity mechanism believes that,the margin trading can provide the market with more funds and stocks,increases market liquidity,thus improves the stock pricing efficiency.In contrast,the arbitrage risk mechanism holds that the larger the margin trading volatility,the more noise trade and the larger the arbitrage risk,leading to lower pricing efficiency.The fire sale mechanism thinks that,the fire sale of investors will amplify the shock,increase market volatility,and reduce the pricing efficiency.For the stock market,we propose the herd effect mechanism hypothesis.It means that,because the herd trading of irrational retail investors,which is the main investors of markets,may strengthen the market co-movement and decrease the pricing efficiency.We measure margin trading and short selling from the perspective of volume,volatility,balance and herd behavior.To measure the stock pricing efficiency,we adopt the stock price crash risk and co-movement variables.We take the margin trading and short selling into consideration at the same time and use the corresponding variables to test the above mechanism.We find,first,margin trading reduces the stock pricing efficiency.The empirical results of individual stocks show that,margin trading increases the stock price crash risk,that is,the pricing efficiency of stock which is available for margin trading is lower;for the stock market,margin trading increases the market co-movement,that is,reduces pricing efficiency,which is contrary to the original aim of introducing margin trading.Besides,the margin trading causes greater co-movement during crises.It may be because although the fundamentals have not changed,due to the margin constraints of financial intermediaries and the deleveraging behavior of investors,shocks will spread to other assets and drive return co-movement.Second,margin trading affects pricing efficiency through fire sale mechanism for individual stocks,and short selling has a greater impact.Moreover,the fire sale mechanism is more obvious during the crisis.The margin trading volume variables cannot improve the pricing efficiency,and the volatility variables cannot affect the efficiency.That is,we reject the liquidity mechanism and arbitrage risk mechanism,which may be due to the high entry barriers of margin trading,especially short selling in China,and the irrationality of investors.However,the balance variables significantly reduce the pricing efficiency,that is,the fire sale mechanism is accepted,and short selling has a greater effect than margin trading.The empirical results during the 2015 stock market crash are similar.We also find the fire sale mechanism is more serious during the crisis.In addition,we analyze the investor margin account of a securities company to illustrate the rationality of the fire sale mechanism.Third,margin trading affects pricing efficiency through herd effect mechanism for the stock market,and margin trading has a greater impact.However,the pricing efficiency is only affected by short selling during the crisis.The results of the full sample show that,the herd behavior in margin trading can increase the market comovement significantly,thereby reducing the pricing efficiency.That is,we accept the herd effect mechanism.And compared with short selling,the effect of margin trading is greater,which is consistent with the fact that margin trading account for a high proportion.The empirical results during the stock market crash in 2015 show that,the market co-movement is only affected by short selling rather than margin trading during the crisis.Our research expands the related literature on margin trading.The existing literature pays more attention on short selling.Considering the large scale of margin trading in China,we take the margin trading into the research.Meanwhile,we enrich the relevant research on pricing efficiency,from the stocks and market level to measure pricing efficiency,which provides a supplement for the study on the effect of margin trading on the pricing efficiency.In addition,the empirical results may provide a theoretical basis for regulators to supervise the margin trading and short selling in China.