| Does trader leverage drive equity market liquidity?This study uses the unique features of the margin trading system and short selling system in China to identify a causal relationship between traders’ ability to borrow and a stock’s market liquidity.This paper studies this problem by using the 3-second Tick data and the sample period is from 2012 to January 2016.We find that that liquidity is higher when stocks become eligible for margin trading and short selling trading and the regulator lifts the restrictions of the use of leverage.This liquidity improvement effect is more pronounced when margin trading and short selling trading are more active.However,Consistent with downward liquidity spirals due to deleveraging,we find that this effect reverses during crises.Compared to other stocks,the liquidity dry-up effect of highly leveraged stocks is more severe during the crisis period.The selling pressure of stocks is positively related to previous leverage level of stocks.This paper explores the reasons behind this phenomenon from the perspective of investors behavior.We find that the irrational behavior of leveraged traders is one of the reasons.Further research indicates that when the market experiences severe downturn,the illiquidity spillover effect exists within and across industry.And providing liquidity will earn significant return in the short term. |
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