Abstract

http://ssrn.com/abstract=2356259
 
 

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Trader Leverage and Liquidity


Bige Kahraman


University of Oxford - Said Business School

Heather Tookes


Yale University - Yale School of Management; Yale University - International Center for Finance

July 6, 2016


Abstract:     
Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock’s market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock’s margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.

Number of Pages in PDF File: 71

Keywords: Trader Leverage, Market Liquidity, Funding Liquidity

JEL Classification: G10, G14


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Date posted: November 19, 2013 ; Last revised: July 7, 2016

Suggested Citation

Kahraman, Bige and Tookes, Heather, Trader Leverage and Liquidity (July 6, 2016). Available at SSRN: http://ssrn.com/abstract=2356259 or http://dx.doi.org/10.2139/ssrn.2356259

Contact Information

Bige Kahraman (Contact Author)
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain

Heather Tookes
Yale University - Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )
Box 208200
New Haven, CT 06520
United States

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