Deleveraging Commonality

43 Pages Posted: 16 Jun 2020

See all articles by Conghui Hu

Conghui Hu

Beijing Normal University, Business School

Yu-Jane Liu

Peking University - Guanghua School of Management

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Tsinghua University - PBC School of Finance

Date Written: May 22, 2020

Abstract

This paper empirically shows that stock-level margin trading commoves significantly with market-aggregate margin trading even after controlling for market return, market-wide liquidity, and individual determinants of margin trading. A closer examination suggests that the common influences and positive feedback mechanisms exhibit considerable variations depending heavily on market conditions, firm characteristics, and the direction of margin change. Specifically, the commonality during the deleveraging process is more pronounced than when leverage increases, and such deleveraging commonality contributes to the worsening of stock liquidity and heightened surges in liquidity commonality. Relying on empirical measures constructed through the limit order book, we further find that market-aggregate margin trading generates much larger impacts on selling pressures and investors’ order submission strategies than its stock-level counterpart during market crashes. Overall, recognizing the existence of commonality offers a simple and alternative way to think about the systematic risk arising from leverage trading.

Keywords: deleveraging commonality, leverage, liquidity, market resiliency

JEL Classification: G1

Suggested Citation

Hu, Conghui and Liu, Yu-Jane and Zhu, Ning, Deleveraging Commonality (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3607782 or http://dx.doi.org/10.2139/ssrn.3607782

Conghui Hu (Contact Author)

Beijing Normal University, Business School ( email )

19 Xinjiekou Outer St
Haidian District
Beijing, Beijing 100875
China

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

Ning Zhu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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