The Impact Of Margin Trading On Holiday Effect

Margin trading mechanism has been launched in China’s stock market since March31,2010, having improved the short-mechanism; it has brought greater market liquidity,and enriched the investment channel for investors. During the four years of rapiddevelopment, its trading size increased, also the number of targets. More and moreinvestors and brokerage firms and other institutions has actively participated in it，causing several central issues. The impact of Margin trading on stock market has beena hot topic of research scholars. Subject to poor data, most scholars collect data inHongkong and Taiwan or overseas, then analyze the effect on stock market in theviews of fluidity and volatility. A clear understanding of the affecting aspects can helpit to be a positive role of the market, and help to averse the risk, besides, guide itdevelop in a better and more stable way.The theory of efficient market hypothesis，put forward by Fama in1970, is thecornerstone of modern financial economics. It holds that prices of securities equal tothe discounted value of future cash flows, which can adequately reflect changes in theinformation available. But since the eighties of the last century, especially in theemerging stock markets, many empirical studies found that the stock market exists many market anomaly contrary to traditional financial market theory, such as holidayeffect, earnings effect, spring effect and weekend effect. Investors can improve thereturn on investment and avoid investment risk by studying these anomalies andcorrespondingly buy or sell shares. In recent years, many scholars have found thephenomenon in their researches of the home and abroad stock markets. Theperformance of the pre-holiday or post-holiday effect is observed significant returnabnormalities before or after holidays, which challenges the efficient market theory.The research of holiday effect can contribute to the development of behavioral financetheory, and the improvement of the operation of market mechanism, also can providea guidance to culture a more rational investment decisions behavior.This paper chose to analyze the effect of margin trading on the stock market holidayeffect, with some innovation, from a theoretical and empirical point of view, using thedata of margin purchase balance and short sale balance, also the HS300index inrecent four years. Firstly, this paper recalls the existing theoretical researchachievements about margin trading and holiday effect, and proposes research ideas; Inthe theoretical analysis, this paper focuses on the definition, characteristics, tradingmechanism of margin, and China’s current development, then definition the generaltheory of the causes of holiday effect, as well as the efficient market theory; In theempirical analysis, after dealing the HS300index daily data, margin purchase dailydata and short sale daily data, through several econometric methods, like ADF,building ARMA-GARCH model and so on, reached the following conclusions:(1) inChina’s stock market, the average pre-holiday income is higher than usual, but theaverage post-holiday income is lower. Festive effect indeed exists, and pre-holidayeffect is more significant.(2) in China’s stock market, the pre-holiday andpost-holiday variance is larger than usual, with a high level volatility.(3) Marginpurchase activities have an impact on holiday effect; but the impact of short salebusiness on the holiday effect is small.(4) Margin purchase activities can weakenpre-holiday effect, but enhance volatility of pre-holiday income.