The Effect Of Securities Margin Trading On Stock Price Volatility

The effect of securities margin trading on stock price volatility has drawn attention of scholars, market regulators and involvers over the world, however no consensus have ever been reached yet. Meanwhile, we also find not many scholars have studied the mechanism that margin trading can affect stock price volatility. Our research has three main contributions: First, our empirical analysis puts an insight into the mechanism that margin trading affect stock price volatility. Second, our research provides market regulator theoretical evidence to enhance their regulations. Third, we reveal the roles that margin loan trader and margin short trader play which will decrease the market involvers’ worry that margin trading may destabilize market. Based on microstructure theory and research framework on stock volume-price volatility relationship, this paper focus on the effect of s ecurities margin trading on stock price volatility from information and liquidity perspectives by using a 5-minute high frequency data which spanning from March 31, 2010 to June 30, 2015 in China A-share markets. Our empirical result concluded as follow:From information perspective, we find margin loan trading has decreased stock price volatility and declined the information content in security trading which implies a lower influence that trade volume can have on stock price volatility. Vice versa, short seller is informed investor who trades more informed and increases the information content in security trading.From liquidity perspective, we find margin loan, as noise trader, has supplied market liquidity when stock price goes down or in bear market. However, short seller is more likely to demand liquidity when stock price goes down and result a higher stock price volatility.Overall, margin trading has reduced the price volatility in China A-share market, which stem from margin loan trade that has provide market more liquidity. The information content of transaction remains unchanged as margin loaner and short seller has offset each other’s’ influence.At last, our research also confirmed price volatility measured with higher frequency data would be better, and also found volatility calculated by high/low is better than close/open especially when data frequency is limited. We also find bull-bear market measured by investor perceived index is much better than historic review based index when model investor behavior in bull-bear market.