Margin-Trading Volatility and Stock Price Crash Risk
53 Pages Posted: 6 May 2020
Date Written: 2019
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: Suggested Citation