Short-Selling, Margin-Trading, and Stock liquidity: Evidence From the Chinese Stock Markets

53 Pages Posted: 29 Jun 2020

See all articles by Qing Ye

Qing Ye

Xi'an Jiaotong-Liverpool University (XJTLU)

Shengjie Zhou

Xi'an Jiaotong-Liverpool University (XJTLU)

Jie Zhang

Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: May 6, 2019

Abstract

We study the impacts of two forms of leveraged trading, namely margin trading and short selling, on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after the restriction of leveraged trading was removed. Margin trading and short selling, however, has opposite impacts on liquidity. In ordinary time periods, margin trading benefits liquidity whereas short selling damages liquidity. However, in market downturns, their roles reversed. We also provide evidence suggesting that short sellers are informed traders in China and short selling reduces stock liquidity due to the increased risk of adverse selection faced by uninformed traders.

Keywords: Margin Trading, Short Selling, Liquidity, Chinese Stock Market

JEL Classification: G1

Suggested Citation

Ye, Qing and Zhou, Shengjie and Zhang, Jie, Short-Selling, Margin-Trading, and Stock liquidity: Evidence From the Chinese Stock Markets (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3594436 or http://dx.doi.org/10.2139/ssrn.3594436

Qing Ye (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Shengjie Zhou

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Jie Zhang

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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