The Effect Of Margin Trading On Chinese Stock Market Research

Margin trading is already quite mature in some developed countries such as United States and Japan as well as some emerging markets such as Taiwan and Hong Kong, while China is still in its infancy. On March31,2010, Shanghai and Shenzhen Stock Exchange formally accepted margin trading. What kind of impact will margin trading have on China’s stock market? Domestic and foreign scholars generally focus on a mature market while few people make a systematic review and empirical research of the characteristics of China’s margin trading. In this paper, in order to make some policy recommendations for China, the writer will have a deeply and wholly analysis of the impact that margin trading make on the stock market from three aspects involving pricing efficiency, stability and liquidity, after a systematical research of the similarities and differences between China and the mature markets on the issues of transaction rules, and then, the writer empirically analyses what kind of impact that margin trading (represented by the transaction of the constituent stocks of SSE50Index) will make on China’s stock market(represented by the SSE50Index).Specifically speaking. Firstly, this paper systematically summarizes and analyzes the findings of literatures on the topic of "What kind of impact will margin trading have on the stock market", and then this paper focuses on the characteristics of China’s margin trading and make a comparison with foreign mature markets (U.S., Japan and Taiwan) to summarize the similarities and differences between them. Next, this paper makes a comprehensive analysis of the impact that margin trading makes on the pricing efficiency, volatility and liquidity of the stock market by an extension and expansion of Miller’s (1977) research framework. After all of this, the paper makes an empirical analysis of the impact through the establishment ofVAR model, ARDL model and etc. At last, according to the result of the empirical analysis, the paper makes some policy recommendations on the reform of the margin trading system in China.The paper gets some conclusions as follows:First, in a short time, short sale transactions will aggravate the volatility of China’s stock market, but after some time, it will reduce the volatility. That is, in the long run, short sale transactions will reduce the volatility of China’s stock market.Second,margin purchase transactions will reduce the volatility of China’s stock market, but its role is very weak. Third, margin purchase or short sale transactions will improve the liquidity of China’s stock market, but its role is very weak.