The Effect Of Margin Trading On Stock Price Volatility In Abnormal Fluctuations

Since the introduction of margin trading in March 2010, the effects of margin trading on stock price volatility is always a hot topic. However, does margin trading stabilize stock price or heighten the volatility? What’s the effect in abnormal fluctuations? The results of these studies are inconclusive. As one of the most important credit trading systems, margin trading is supposed to stabilize the stock market. But in the financial crash, many western countries restricted margin trading. The positive effects of margin trading are suspectable. From late 2014 to 2015, the Chinese stock market has experienced a significant boom and crash, provid ing a precious natural opportunity for us to investigate the effects of margin trading in abnormal fluctuations. Recognizing the effects of margin trading on stock price volatility, especially in abnormal fluctuations, will contribute to the development of credit trading system of China, give investors appropriate guidance when making investment decisions and provide advices of regulation of stock market during abnormal fluctuations.Since A-share stock market has not experienced sharp boom and crash after the introduction of margin trading, there is no research about the effect of margin trading in abnormal fluctuations. This paper concentrates on the A-share stock market in 2015, from a new perspective of abnormal fluctuation, studying the effects of margin trading on the stock price volatility in the abnormal fluctuations. This paper firstly concludes the existing researches and theories and raises hypotheses. Then, the paper employs the method of sample matching to find a non-underlying stock to every underlying stock of margin trading in the same industry to make them as comparable as possible. The next step is to extract and process data. In the empirical analysis, this paper firstly employs the Difference-in-Difference(DID) model to estimate the effects of margin trading on the stock price volatility in the whole abnormal fluctuation period. Then partition the period into three sub-periods: the sub-period with dramatic up-trend, the sub-period with dramatic down-trend and the sub-period with high volatility but lower up-trend, utilizing the DID model to estimate the effects in the different sub-periods.The results show in the whole abnormal fluctuation period, margin trading significantly heightened the stock price volatility. However, when the market is experiencing different conditions, the effects are different. When the market dramatically goes up, margin trading heightened the stock price volatility. In the collapse of market, margin trading exacerbated the stock price volatility and the effects are more significant. Finally, when the market fluctuates with lower up-trend, the margin trading stabilized the stock price volatility. In this period of market, the scale of margin trading was restricted, so the result was induced by the original stable characteristic of underlying stocks.