Margin-Trading Volatility and Stock Price Crash Risk

53 Pages Posted: 6 May 2020

See all articles by Dayong Lv

Dayong Lv

affiliation not provided to SSRN

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Date Written: 2019

Abstract

Previous studies rarely discuss the effect of margin trading on future stock price crash risk, though margin trading is often blamed for destabilizing stock market. We propose three possible mechanisms through which margin trading may affect crash risk. Our empirical results show that neither margin-buying activity nor margin debt are associated with future crash risk, rejecting mechanisms of both “liquidity provision” and “fire sales”. In contrasts, stocks with more margin-trading volatility are predicted to have more crash risk, supporting the view of “arbitrage risk mechanism”. Furthermore, we find that higher margin-trading volatility results in higher overpricing and less information content.

Keywords: margin trading; crash risk; arbitrage risk; overpricing; information content

JEL Classification: G14; G32; G12

Suggested Citation

Lv, Dayong and Wu, Wenfeng, Margin-Trading Volatility and Stock Price Crash Risk (2019). Pacific-Basin Finance Journal, Vol. 56, 2019, Available at SSRN: https://ssrn.com/abstract=3573473 or http://dx.doi.org/10.2139/ssrn.3573473

Dayong Lv

affiliation not provided to SSRN

Wenfeng Wu (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 535 Fahuazhen Road
Shanghai, Shanghai 200052
China

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