Trader Leverage and Liquidity
University of Oxford - Said Business School
Yale University - Yale School of Management; Yale University - International Center for Finance
July 6, 2016
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
Date posted: November 19, 2013 ; Last revised: July 7, 2016
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.250 seconds