Short-Selling, Margin-Trading, and Stock liquidity: Evidence From the Chinese Stock Markets
53 Pages Posted: 29 Jun 2020
Date Written: May 6, 2019
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
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