A Study Of Margin Impact On Stock Prices

As a special credit trading system, margin trading has already been operated in the western market for a long time with a fully developed operation mechanism. Compared with the mature and regularized western market, margin trading is relatively a new line of operation in China when the pilot work only started in March 2010 after a long era of "unilateral market". On 25th November 2011, Shanghai Stock Exchange Margin Trading Rules are released and margin trading has become a regular operation in the financial markets.The scale of margin trading grows with the expansion of the security market, and as the pool of underlying securities are further widened, investors have a high level of enthusiasm to participate in this trade. Thus how margin trading can better serve the security market and the investors in China has become our primary concern and needs more research. Much conflicting opinions are seen in the impact of margin trading on the price stability of securities. Now most domestic related research focuses on the impact of short sale on securities prices and systematic research of how margin trading influence the volatility of stock market and underlying stocks are rarely seen. Drawing on previous research, this empirical study analyzes how margin trading influence volatility of the whole stock market and particular stocks in China.This paper first introduces the basic theories and concepts of margin trading as well as its transaction modes, influencing mechanisms, history and current status in China stock market. Based on a holistic view of the stock market and also the details of individual stocks, this paper will analyze daily margin trading transaction data from Shanghai and Shenzhen stock market to probe into its influence on the volatility of stock market by using GARCH, VAR and other fixed effect model.The findings show that margin trading will not contribute to the volatility of the stock market and generally play as a stabilizer of the market. Both forms of margin trading can buffer market fluctuations with more substantial influences on underlying stocks. Margin purchases will decrease the volatility of stock market while short selling will increase the level of fluctuation, though the increase influence is very little.Based on the conclusions of the study, this paper finally presents some rational suggestions on the policies of developing margin trading in China, with regard to its promotion, lift on restrictions, and at the same time the strengthening of supervision and regularization of trading rules so that margin trading better facilitate its role as security market stabilizer and secure a healthy development of the financial stock market in China.