Leverage Network and Market Contagion

58 Pages Posted: 28 Sep 2017 Last revised: 13 Mar 2019

See all articles by Jiangze Bian

Jiangze Bian

University of International Business and Economics (UIBE)

Zhi Da

University of Notre Dame - Mendoza College of Business

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Hao Zhou

Tsinghua University - PBC School of Finance

Date Written: March 2019

Abstract

Using detailed data of margin investors’ leverage ratios and trading activities, we provide novel evidence for the effect of margin-induced trading on the cross-section of stock returns during the recent market turmoil in China. We first document the deleverge-induced sales. Aggregating this behavior across margin investors, we find a significant return spillover: a stock’s return can be strongly forecasted by a portfolio of stocks with which it shares common margin investor ownership. This pattern is subsequently reversed, and is present only in market downturns. Exploiting three government bailout waves of the stock market, we provide additional evidence for the shock transmission role of, and the systematic importance of central stocks in the leverage network.

Keywords: Margin trading, leverage, contagion, network centrality

JEL Classification: G11, G12, G13

Suggested Citation

Bian, Jiangze and Da, Zhi and Lou, Dong and Zhou, Hao, Leverage Network and Market Contagion (March 2019). PBCSF-NIFR Research Paper. Available at SSRN: https://ssrn.com/abstract=3043514 or http://dx.doi.org/10.2139/ssrn.3043514

Jiangze Bian

University of International Business and Economics (UIBE) ( email )

10, East Huixin Street, Chaoyang District
Beijing, 100029
China

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
86-10-62790655 (Phone)

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