Does Margin Trading Reduce The Volatility Of China's Stock Market

Since China launched the pilot project of margin trading on March 31,2010,the unilateral trading mechanism,which only included long positon and excluded short selling,ended.Then,investors in the Chinese stock market can buy stocks through financing when the price is going up,and then sell stocks to repay the loans they owe after the price goes up.When the price is going down,investors can sell stocks by borrowing securities from securities companies,and then buy back the stocks and return them to securities companies after the price drops.Margin trading is a milestone event in Chinese stock market.It has played an important role in improving stock pricing.China's margin trading has experienced five expansions.The turnover has realized a big growth.What' more,China encountered a new bull and bear market in around 2015.There has been some research on the impact of margin trading on stock market volatility.Some scholars think that margin trading reduces the volatility of the stock market,while some scholars think that the business has no obvious impact on the volatility of the stock market.Other scholars think that margin financing and short selling business aggravate the volatility of the stock market.Over all,the impact of margin trading on the volatility of Chinese stock market has always been of far-reaching significance in theoretical and practical aspects.The research of this paper divides into two parts:theoretical research and empirical research.The theoretical part analyzes the economical basis of margin financing,including overvaluing stock price hypothesis,volatility theory and noise theory of transaction,and theoretically analyzes the impact transmission mechanism of margin trading on Chinese stock market volatility.The impact of the two financial services on Chinese stock market volatility has two aspects,which can not only aggravate the volatility,but also stabilize the market.In the empirical part,this author selects the volatility rate of CSI300 index as the proxy variable of Chinese stock market volatility.The net purchase amount of daily financing and the net selling amount of daily margin trading represent the scale of margin trading and short sale respectively.The article used GARCH(1,1)model in analyzing the volatility of stock market,which has been widely recognized by the academia.The article uses VAR model,Granger causality test,and impulse response analysis and variance decomposition to analyze the impact of margin trading on Chinese stock market volatility.The sample interval includes two parts,before the third expansion of margin trading underlying securities from March 31 2010 to September 13 2013 and after the third expansion from September 16 2013 to the latest date March 8 2018.The empirical results show that the impact of margin trading on stock market volatility is not very significant before the expansion.Margin trading and short sales stabilize the market to a small extent.Margin trading and market volatility are each other's Granger causes.What's more,short sales and stock market volatility predict each other badly in statistics.After the expansion at the significant level of 1%,margin trading and stock market volatility are each other's Granger cause;short sale and stock market volatility are each other's Granger cause.Both the margin trading business and the short margin business reduce the volatility of the stock market to a certain extent,and the impacts are sustainable.More specifically,the impact of the margin trading transaction is greater than that of the short selling.The expansion of underlying securities further releases the vitality ofmargin trading and their function of price discovery.Given the investors' lack of consciousness of rational operation,the high interest rate of margin trading,the limited proportion of underlying stocks,the unbalanced development of margin trading and short selling as well as the conclusions of the empirical analysis in this paper,the author gives the supervision suggestion on the development of margin trading in China.1)We ought to strengthen investor education,improve investors' recognition of margin trading,and cultivate rational investors to improve the pricing mechanism of margin trading.2)Having ensured the profit of the securities companies,we should appropriately lower the interest rate and attract potential investors.3)We had better expand the range of stocks that are subject to margin trading and short selling,to enrich the variety of transactions to offer more stocks with reasonable risk hedging mechanism.4)We should improve the current situation of financial market supervision and promote the development and improvement of short selling system in our country.